Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2006
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
| MISSOURI (State or other jurisdiction of incorporation or organization) |
44-0607856 (I.R.S. Employer Identification No.) |
4400 Main Street
Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)
Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares outstanding of the registrant’s Common Stock, without par value, at the close
of business on February 28, 2006 was 328,415,828 shares.
H&R BLOCKForm 10-Q for the Period Ended January 31, 2006
Table of Contents
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H&R BLOCK
CONDENSED CONSOLIDATED BALANCE SHEETS
| (amounts in 000s, except share amounts) | ||||||||
| Restated | ||||||||
| January 31, 2006 | April 30, 2005 | |||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 1,460,180 | $ | 1,100,213 | ||||
Cash and cash equivalents — restricted |
430,713 | 516,909 | ||||||
Receivables from customers, brokers, dealers and clearing
organizations, net |
569,430 | 590,226 | ||||||
Receivables, less allowance for doubtful accounts
of $56,985 and $38,879 |
1,810,945 | 418,788 | ||||||
Prepaid expenses and other current assets |
561,484 | 444,498 | ||||||
Total current assets |
4,832,752 | 3,070,634 | ||||||
Residual interests in securitizations — available-for-sale |
175,068 | 205,936 | ||||||
Beneficial interest in Trusts — trading |
279,714 | 215,367 | ||||||
Mortgage servicing rights |
262,369 | 166,614 | ||||||
Property and equipment, at cost less accumulated depreciation
and amortization of $729,405 and $658,425 |
415,844 | 330,150 | ||||||
Intangible assets, net |
235,236 | 247,092 | ||||||
Goodwill, net |
1,104,267 | 1,015,947 | ||||||
Other assets |
367,091 | 286,316 | ||||||
Total assets |
$ | 7,672,341 | $ | 5,538,056 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Liabilities: |
||||||||
Short-term borrowings |
$ | 2,595,948 | $ | — | ||||
Current portion of long-term debt |
13,373 | 25,545 | ||||||
Accounts payable to customers, brokers and dealers |
851,827 | 950,684 | ||||||
Accounts payable, accrued expenses and other current liabilities |
782,744 | 564,749 | ||||||
Accrued salaries, wages and payroll taxes |
291,811 | 318,644 | ||||||
Accrued income taxes |
214,559 | 375,174 | ||||||
Total current liabilities |
4,750,262 | 2,234,796 | ||||||
Long-term debt |
916,926 | 923,073 | ||||||
Other noncurrent liabilites |
417,200 | 430,919 | ||||||
Total liabilities |
6,084,388 | 3,588,788 | ||||||
Stockholders’ equity: |
||||||||
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, 435,890,796 shares
issued at January 31, 2006 and April 30, 2005 |
4,359 | 4,359 | ||||||
Additional paid-in capital |
631,729 | 598,388 | ||||||
Accumulated other comprehensive income |
33,641 | 68,718 | ||||||
Retained earnings |
2,945,887 | 3,161,682 | ||||||
Less cost of 107,594,856 and 104,649,850 shares of
common stock in treasury |
(2,027,663 | ) | (1,883,879 | ) | ||||
Total stockholders’ equity |
1,587,953 | 1,949,268 | ||||||
Total liabilities and stockholders’ equity |
$ | 7,672,341 | $ | 5,538,056 | ||||
See Notes to Condensed Consolidated Financial Statements
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H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| (Unaudited, amounts in 000s, | ||||||||||||||||
| except per share amounts) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues: |
||||||||||||||||
Service revenues |
$ | 812,224 | $ | 657,306 | $ | 1,511,615 | $ | 1,196,126 | ||||||||
Other revenues: |
||||||||||||||||
Gains on sales of mortgage assets, net |
157,897 | 198,584 | 541,595 | 566,092 | ||||||||||||
Interest income |
51,074 | 50,545 | 155,337 | 138,817 | ||||||||||||
Product and other revenues |
135,552 | 129,801 | 168,236 | 163,705 | ||||||||||||
| 1,156,747 | 1,036,236 | 2,376,783 | 2,064,740 | |||||||||||||
Operating expenses: |
||||||||||||||||
Cost of services |
633,927 | 508,207 | 1,364,362 | 1,123,266 | ||||||||||||
Cost of other revenues |
144,663 | 133,343 | 402,884 | 307,987 | ||||||||||||
Selling, general and administrative |
344,246 | 248,114 | 740,047 | 593,177 | ||||||||||||
| 1,122,836 | 889,664 | 2,507,293 | 2,024,430 | |||||||||||||
Operating income (loss) |
33,911 | 146,572 | (130,510 | ) | 40,310 | |||||||||||
Interest expense |
12,211 | 13,026 | 37,031 | 48,900 | ||||||||||||
Other income, net |
3,708 | 19,732 | 13,951 | 23,250 | ||||||||||||
Income (loss) before taxes |
25,408 | 153,278 | (153,590 | ) | 14,660 | |||||||||||
Income taxes (benefit) |
13,295 | 59,542 | (56,460 | ) | 5,680 | |||||||||||
Net income (loss) |
$ | 12,113 | $ | 93,736 | $ | (97,130 | ) | $ | 8,980 | |||||||
Basic earnings (loss) per share |
$ | 0.04 | $ | 0.28 | $ | (0.30 | ) | $ | 0.03 | |||||||
Basic shares |
327,289 | 329,039 | 328,017 | 331,894 | ||||||||||||
Diluted earnings (loss) per share |
$ | 0.04 | $ | 0.28 | $ | (0.30 | ) | $ | 0.03 | |||||||
Diluted shares |
331,935 | 334,875 | 328,017 | 337,889 | ||||||||||||
Dividends per share |
$ | 0.13 | $ | 0.11 | $ | 0.36 | $ | 0.32 | ||||||||
Comprehensive income (loss): |
||||||||||||||||
Net income (loss) |
$ | 12,113 | $ | 93,736 | $ | (97,130 | ) | $ | 8,980 | |||||||
Change in unrealized gain on
available-for-sale securities, net |
(3,002 | ) | (6,494 | ) | (32,466 | ) | 23,060 | |||||||||
Change in foreign currency
translation adjustments |
(7,820 | ) | 1,917 | (2,611 | ) | 9,958 | ||||||||||
Comprehensive income (loss) |
$ | 1,291 | $ | 89,159 | $ | (132,207 | ) | $ | 41,998 | |||||||
See Notes to Condensed Consolidated Financial Statements
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H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| (Unaudited, amounts in 000s) | ||||||||
| Restated | ||||||||
| Nine months ended January 31, | 2006 | 2005 | ||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (97,130 | ) | $ | 8,980 | |||
Adjustments to reconcile net income (loss) to net cash
used in operating activities: |
||||||||
Depreciation and amortization |
138,882 | 127,631 | ||||||
Accretion of residual interests in securitizations |
(93,189 | ) | (96,242 | ) | ||||
Impairments of available-for-sale residual interests |
29,175 | 7,162 | ||||||
Additions to trading securities — residual interests
in securitizations, net |
(228,587 | ) | (115,213 | ) | ||||
Proceeds from net interest margin transactions, net |
195,159 | 98,743 | ||||||
Realized gain on sale of available-for-sale residual interests |
(28,675 | ) | — | |||||
Additions to mortgage servicing rights |
(196,245 | ) | (94,569 | ) | ||||
Amortization and impairment of mortgage servicing rights |
100,490 | 60,879 | ||||||
Net change in beneficial interest in Trusts |
(64,347 | ) | (8,735 | ) | ||||
Other, net of acquisitions |
(1,445,080 | ) | (1,553,069 | ) | ||||
Net cash used in operating activities |
(1,689,547 | ) | (1,564,433 | ) | ||||
Cash flows from investing activities: |
||||||||
Cash received from available-for-sale residual interests |
74,931 | 100,344 | ||||||
Cash received from sale of available-for-sale residual interests |
30,497 | — | ||||||
Purchases of property and equipment, net |
(167,181 | ) | (143,232 | ) | ||||
Payments made for business acquisitions, net of cash acquired |
(209,816 | ) | (26,348 | ) | ||||
Other, net |
17,297 | 15,207 | ||||||
Net cash used in investing activities |
(254,272 | ) | (54,029 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayments of commercial paper |
(2,632,444 | ) | (2,348,966 | ) | ||||
Proceeds from issuance of commercial paper |
4,678,392 | 3,877,848 | ||||||
Proceeds from other short-term borrowings |
550,000 | — | ||||||
Repayments of long-term debt |
— | (250,000 | ) | |||||
Proceeds from issuance of long-term debt, net |
— | 395,221 | ||||||
Dividends paid |
(118,665 | ) | (106,422 | ) | ||||
Acquisition of treasury shares |
(260,078 | ) | (529,852 | ) | ||||
Proceeds from issuance of common stock |
105,760 | 119,892 | ||||||
Other, net |
(19,179 | ) | (35,414 | ) | ||||
Net cash provided by financing activities |
2,303,786 | 1,122,307 | ||||||
Net increase (decrease) in cash and cash equivalents |
359,967 | (496,155 | ) | |||||
Cash and cash equivalents at beginning of the period |
1,100,213 | 1,072,745 | ||||||
Cash and cash equivalents at end of the period |
$ | 1,460,180 | $ | 576,590 | ||||
See Notes to Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(Unaudited) |
| 1. | Basis of Presentation | |
| The condensed consolidated balance sheet as of January 31, 2006, the condensed consolidated statements of income and comprehensive income for the three and nine months ended January 31, 2006 and 2005, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2006 and 2005 have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at January 31, 2006 and for all periods presented have been made. |
“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R
Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain reclassifications have been made to prior year amounts to conform to the current year
presentation. These reclassifications had no effect on our results of operations or stockholders’
equity as previously reported. Adjustments related to the restatements of previously issued
financial statements are detailed in note 2.
On June 8, 2005, our Board of Directors declared a two-for-one stock split of the Company’s
Common Stock in the form of a 100% stock distribution, effective August 22, 2005, to shareholders
of record as of the close of business on August 1, 2005. All share and per share amounts in this
document have been adjusted to reflect the effect of the stock split.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted. These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in our April 30, 2005 Annual
Report to Shareholders on Form 10-K/A.
Operating revenues of the Tax Services and Business Services segments are seasonal in nature
with peak revenues occurring in the months of January through April. Therefore, results for interim
periods are not indicative of results to be expected for the full year.
| 2. | Restatements of Previously Issued Financial Statements | |
| (A) On February 22, 2006, management and the Audit Committee of the Board of Directors concluded to restate previously issued consolidated financial statements for the fiscal quarters ended October 31, 2005 and July 31, 2005, the fiscal years ended April 30, 2005 and 2004 and the related fiscal quarters. We arrived at this conclusion during the course of our closing process for the quarter ended January 31, 2006. This restatement pertains primarily to errors in determining the Company’s state effective income tax rate, including errors in identifying changes in state apportionment, expiring state net operating losses and related factors. These errors resulted in an understatement of income tax expense (net of federal income tax benefit) of approximately $2.0 million and $0.2 million for the three and nine months ended January 31, 2005, respectively, an overstatement of deferred income tax assets of $1.2 million as of April 30, 2005 and an understatement of accrued income taxes of approximately $25.9 million as of April 30, 2005. The effect of the above adjustments on the condensed consolidated financial statements is set forth in “2C” below. | ||
| Income tax expense for the three months ended January 31, 2006 includes $3.4 million related to the correction of errors in state income taxes relating to periods prior to May 1, 2003. These errors were determined to be immaterial to both the current fiscal year and the applicable prior period results. |
(B) On June 7, 2005, management and the Audit Committee of the Board of Directors determined
that restatement of our previously issued consolidated financial statements, including financial
statements for the three and nine months ended January 31, 2005, was appropriate as a result of the
errors noted below. All amounts listed are pretax, unless otherwise noted.
| • | An error in calculating the gain on sale of residual interests in fiscal year 2003. This error was corrected by deferring a portion of the gain on sale of residual interests as of the transaction date in fiscal year 2003 and recognizing revenue from the sale as interest income from accretion of residual interests in subsequent periods. Interest income from accretion increased $3.9 million |
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| and $9.6 million for the three and nine months ended January 31, 2005, respectively. This correction also decreased impairments of residual interests $0.3 million and $1.1 million for the three and nine months ended January 31, 2005, respectively, and decreased comprehensive income $2.6 million and $6.7 million for the three and nine months ended January 31, 2005, respectively. |
| • | An error in the calculation of an incentive compensation accrual at our Mortgage Services segment as of April 30, 2004. This error resulted in an overstatement of compensation expense for the nine months ended January 31, 2005 of $12.1 million. | ||
| • | An error in accounting for leased properties related to rent holidays and mandatory rent escalation in our Tax Services, Mortgage Services and Investment Services segments. Rent expense was understated for the three and nine months ended January 31, 2005 by $1.2 million and $1.8 million, respectively. | ||
| • | An error from the capitalization of certain branch office costs at our Investment Services segment, which should have been expensed as incurred. This error resulted in an understatement of occupancy expenses and an overstatement of depreciation expense and capital expenditures, resulting in a net overstatement of operating expenses of $0.4 million and $5.9 million for the three and nine months ended January 31, 2005, respectively. | ||
| • | Errors related to accounting for acquisitions at our Business Services and Investment Services segments, the largest of which was the acquisition of OLDE in fiscal year 2000. Amortization of customer relationships was understated by $1.8 million and $5.5 million for the three and nine months ended January 31, 2005, respectively, and the provision for income taxes was overstated by approximately $3.7 million and $11.2 million, respectively, related to this error. | ||
| The effect of the above adjustments on the condensed consolidated financial statements is set forth in “2C” below. |
(C) Notes 4, 5, 6, 7, 9, 13 and 15 have been restated to reflect the above described
adjustments. The following is a summary of the impact of the restatements on our condensed
consolidated statement of income and comprehensive income for the three and nine months ended
January 31, 2005:
| (in 000s, except per share amounts) | ||||||||||||||||||||
| Three months ended January 31, 2005 | ||||||||||||||||||||
| As Previously | ||||||||||||||||||||
| Reported (1) | Adjustments (2) | Subtotal | Adjustments (3) | Restated | ||||||||||||||||
Gain on sale of mortgage assets, net |
$ | 198,301 | $ | 283 | $ | 198,584 | $ | — | $ | 198,584 | ||||||||||
Interest income |
46,599 | 3,946 | 50,545 | — | 50,545 | |||||||||||||||
Total revenues |
1,032,007 | 4,229 | 1,036,236 | — | 1,036,236 | |||||||||||||||
Total operating expenses |
887,030 | 2,634 | 889,664 | — | 889,664 | |||||||||||||||
Operating income |
144,977 | 1,595 | 146,572 | — | 146,572 | |||||||||||||||
Income before taxes |
151,683 | 1,595 | 153,278 | — | 153,278 | |||||||||||||||
Income taxes |
59,991 | (2,478 | ) | 57,513 | 2,029 | 59,542 | ||||||||||||||
Net income |
91,692 | 4,073 | 95,765 | (2,029 | ) | 93,736 | ||||||||||||||
Basic earnings per share |
$ | 0.28 | $ | 0.01 | $ | 0.29 | $ | (0.01 | ) | $ | 0.28 | |||||||||
Diluted earnings per share |
$ | 0.27 | $ | 0.02 | $ | 0.29 | $ | (0.01 | ) | $ | 0.28 | |||||||||
Change in unrealized gain on
available-for-sale securities, net |
$ | (3,881 | ) | $ | (2,613 | ) | $ | (6,494 | ) | $ | — | $ | (6,494 | ) | ||||||
Comprehensive income |
89,728 | 1,460 | 91,188 | (2,029 | ) | 89,159 | ||||||||||||||
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| Nine months ended January 31, 2005 | ||||||||||||||||||||
| As Previously | ||||||||||||||||||||
| Reported (1) | Adjustments (2) | Subtotal | Adjustments (3) | Restated | ||||||||||||||||
Gain on sale of mortgage assets, net |
$ | 564,949 | $ | 1,143 | $ | 566,092 | $ | — | $ | 566,092 | ||||||||||
Interest income |
129,193 | 9,624 | 138,817 | — | 138,817 | |||||||||||||||
Total revenues |
2,053,973 | 10,767 | 2,064,740 | — | 2,064,740 | |||||||||||||||
Total operating expenses |
2,035,128 | (10,698 | ) | 2,024,430 | — | 2,024,430 | ||||||||||||||
Operating income |
18,845 | 21,465 | 40,310 | — | 40,310 | |||||||||||||||
Income (loss) before taxes |
(6,805 | ) | 21,465 | 14,660 | — | 14,660 | ||||||||||||||
Income taxes (benefit) |
(2,215 | ) | 7,724 | 5,509 | 171 | 5,680 | ||||||||||||||
Net income (loss) |
(4,590 | ) | 13,741 | 9,151 | (171 | ) | 8,980 | |||||||||||||
Basic earnings (loss) per share |
$ | (0.01 | ) | $ | .04 | $ | 0.03 | $ | — | $ | 0.03 | |||||||||
Diluted earnings (loss) per share |
$ | (0.01 | ) | $ | .04 | $ | 0.03 | $ | — | $ | 0.03 | |||||||||
Change in unrealized gain on
available-for-sale securities, net |
$ | 29,714 | $ | (6,654 | ) | $ | 23,060 | $ | — | $ | 23,060 | |||||||||
Comprehensive income |
35,082 | 7,087 | 42,169 | (171 | ) | 41,998 | ||||||||||||||
| (1) | As reported in our Form 10-Q filed on March 9, 2005 for the nine months ended January 31, 2005. Amounts have been reclassified to conform to current year presentation. See discussion of reclassifications in note 1. | |
| (2) | Adjusted to reflect the restatement described in “2B” above, as derived from the Company’s Form 10-K/A filed on August 5, 2005 for the fiscal year ended April 30, 2005. | |
| (3) | Adjusted to reflect the restatement described in “2A” above. |
The following is a summary of the impact of the restatements on our condensed
consolidated statement of cash flows for the nine months ended January 31, 2005:
| (in 000s) | ||||||||||||||||||||
| As Previously | ||||||||||||||||||||
| Reported (1) | Adjustments (2) | Subtotal | Adjustments (3) | Restated | ||||||||||||||||
Net income (loss) |
$ | (4,590 | ) | $ | 13,741 | $ | 9,151 | $ | (171 | ) | $ | 8,980 | ||||||||
Depreciation and amortization |
122,305 | 5,326 | 127,631 | — | 127,631 | |||||||||||||||
Accretion of residual interests
in securitizations |
(86,618 | ) | (9,624 | ) | (96,242 | ) | — | (96,242 | ) | |||||||||||
Impairment of available-for-sale
residual interests |
8,304 | (1,142 | ) | 7,162 | — | 7,162 | ||||||||||||||
Other, net of acquisitions |
(1,550,688 | ) | (2,552 | ) | (1,553,240 | ) | 171 | (1,553,069 | ) | |||||||||||
Net cash used in operating activities |
(1,570,182 | ) | 5,749 | (1,564,433 | ) | — | (1,564,433 | ) | ||||||||||||
Purchases of property and equipment, net |
(137,483 | ) | (5,749 | ) | (143,232 | ) | — | (143,232 | ) | |||||||||||
Net cash used in investing activities |
(48,280 | ) | (5,749 | ) | (54,029 | ) | — | (54,029 | ) | |||||||||||
| (1) | As reported in our Form 10-Q filed on March 9, 2005 for the nine months ended January 31, 2005. Amounts have been reclassified to conform to current year presentation. See discussion of reclassifications in note 1. | |
| (2) | Adjusted to reflect the restatement described in “2B” above, as derived from the Company’s Form 10-K/A filed on August 5, 2005 for the fiscal year ended April 30, 2005. | |
| (3) | Adjusted to reflect the restatement described in “2A” above. |
The restatements had no impact on our cash flows from financing activities as
previously reported.
| 3. | Business Combinations | |
| Effective October 1, 2005, we acquired all outstanding common stock of American Express Tax and Business Services, Inc. for an aggregate purchase price of $191.7 million, subject to a post-closing adjustment based upon determination of the final September 30, 2005 net asset value. During the three months ended January 31, 2006, we completed the final valuation of intangible assets. Results related to American Express Tax and Business Services, Inc. have been included in our condensed consolidated financial statements since October 1, 2005. Pro forma results of operations have not been presented because the effects of this acquisition were not material to our results. The accompanying balance sheet reflects a preliminary allocation of the purchase price to assets acquired and liabilities assumed as follows: |
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| (in 000s) | ||||
Property and equipment |
$ | 17,664 | ||
Other assets |
121,228 | |||
Liabilities |
(51,701 | ) | ||
Amortizing intangible assets |
28,100 | |||
Goodwill |
76,383 | |||
| $ | 191,674 | |||
Goodwill recognized in these transactions is included in the Business Services
segment and is not deductible for tax purposes. The preliminary purchase price allocations are
subject to change and will be adjusted based upon resolution of several matters including, but not
limited to, the following:
| • | Determination of the post-closing adjustment and final purchase price; | ||
| • | Determination of final liabilities relating to planned exit activities; and | ||
| • | Determination of the tax basis of acquired assets and liabilities, and deferred tax balances of the acquired business. |
| 4. | Earnings (Loss) Per Share | |
| Basic earnings (loss) per share is computed using the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings (loss) per share except in those periods with a loss. The computations of basic and diluted earnings (loss) per share are as follows: |
| (in 000s, except per share amounts) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Net income (loss) |
$ | 12,113 | $ | 93,736 | $ | (97,130 | ) | $ | 8,980 | |||||||
Basic weighted average common shares |
327,289 | 329,039 | 328,017 | 331,894 | ||||||||||||
Potential dilutive shares from stock options
and restricted stock |
4,644 | 5,834 | — | 5,993 | ||||||||||||
Convertible preferred stock |
2 | 2 | — | 2 | ||||||||||||
Dilutive weighted average common shares |
331,935 | 334,875 | 328,017 | 337,889 | ||||||||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 0.04 | $ | 0.28 | $ | (0.30 | ) | $ | 0.03 | |||||||
Diluted |
0.04 | 0.28 | (0.30 | ) | 0.03 | |||||||||||
Diluted earnings per share excludes the impact of shares of common stock issuable
upon the lapse of certain restrictions or the exercise of options to purchase 29.3 million shares
of stock for the nine months ended January 31, 2006 as the effect would be antidilutive due to the
net loss recorded during the period. Diluted earnings per share for the three months ended January
31, 2006 and the three and nine months ended January 31, 2005 excludes the impact of 7.1 million,
0.7 million and 1.4 million shares, respectively, issuable upon the exercise of stock options, as
the effect would be antidilutive due to the options’ exercise prices being greater than the average
market price of the common shares during the period.
The weighted average shares outstanding for the three and nine months ended January 31, 2006
decreased to 327.3 million and 328.0 million, respectively, from 329.0 million and 331.9 million
last year, primarily due to our purchases of treasury shares. The effect of these purchases was
partially offset by the issuance of treasury shares related to our stock-based compensation plans.
During each of the nine month periods ended January 31, 2006 and 2005, we issued 6.3 million
and 6.5 million shares of common stock, respectively, pursuant to the exercise of stock options,
employee stock purchases and awards of restricted shares, in accordance with our stock-based
compensation plans.
During the nine months ended January 31, 2006, we acquired 9.2 million shares of our common
stock, of which 9.0 million shares were purchased from third parties with the remaining shares
swapped or surrendered to us, at an aggregate cost of $260.1 million. During the nine months ended
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January 31, 2005, we acquired 22.6 million shares of our common stock, of which 22.5 million were
purchased from third parties, at an aggregate cost of $529.9 million.
| 5. | Receivables | |
| Receivables consist of the following: |
| (in 000s) | ||||||||||||
| January 31, 2006 | January 31, 2005 | April 30, 2005 | ||||||||||
Participation in refund anticipation loans (RALs) |
$ | 900,230 | $ | 829,325 | $ | 57,084 | ||||||
Mortgage loans held for sale |
336,213 | 128,607 | 79,458 | |||||||||
Business Services accounts receivable |
312,087 | 175,140 | 178,338 | |||||||||
Receivables for tax-related fees |
115,906 | 108,331 | 5,760 | |||||||||
Loans to franchisees |
60,185 | 52,712 | 39,022 | |||||||||
Royalties from franchisees |
50,575 | 46,900 | 668 | |||||||||
Software receivables |
18,938 | 26,420 | 22,578 | |||||||||
Other |
73,796 | 87,539 | 74,759 | |||||||||
| 1,867,930 | 1,454,974 | 457,667 | ||||||||||
Allowance for doubtful accounts |
(34,144 | ) | (21,336 | ) | (34,201 | ) | ||||||
Lower of cost or market adjustment — mortgage loans |
(22,841 | ) | (11,645 | ) | (4,678 | ) | ||||||
| $ | 1,810,945 | $ | 1,421,993 | $ | 418,788 | |||||||
| 6. | Mortgage Banking Activities | |
| Activity related to available-for-sale residual interests in securitizations consists of the following: |
| (in 000s) | ||||||||
| Restated | ||||||||
| Nine months ended January 31, | 2006 | 2005 | ||||||
Balance, beginning of period |
$ | 205,936 | $ | 210,973 | ||||
Additions from net interest margin (NIM) transactions |
39,378 | 16,470 | ||||||
Cash received |
(74,931 | ) | (100,344 | ) | ||||
Cash received on sale of residual interests |
(30,497 | ) | — | |||||
Accretion |
87,240 | 96,242 | ||||||
Impairments of fair value |
(29,175 | ) | (7,162 | ) | ||||
Other |
366 | (4 | ) | |||||
Changes in unrealized holding gains, net |
(23,249 | ) | 37,356 | |||||
Balance, end of period |
$ | 175,068 | $ | 253,531 | ||||
We sold $32.3 billion and $21.7 billion of mortgage loans in loan sales to warehouse
trusts (Trusts) or other buyers during the nine months ended January 31, 2006 and 2005,
respectively, with gains totaling $450.2 million and $544.4 million, respectively, recorded on
these sales.
Net additions to trading residual interests recorded in connection with the securitization of
mortgage loans totaled $228.6 million and $115.2 million during the nine months ended January 31,
2006 and 2005, respectively. Trading residuals valued at $234.5 million were securitized in net
interest margin (NIM) transactions during the current year, with net cash proceeds of $195.2
million received in connection with NIM transactions. In the prior year, trading residuals valued
at $115.2 million were securitized with net cash proceeds of $98.7 million received on the
transactions. Total net additions to residual interests from NIM transactions for the nine months
ended January 31, 2006 and 2005 were $39.4 million and $16.5 million, respectively.
During the nine months ended January 31, 2006, we completed the sale of $40.5 million of
previously securitized residual interests and recorded a gain of $28.7 million. We received cash
proceeds of $30.5 million and retained a $10.0 million residual interest in the sale. This sale
accelerates cash flows from the residual interests and recognition of unrealized gains included in
other comprehensive income.
Although we recorded residual interests classified as trading securities during the nine
months ended January 31, 2006 and 2005, at the end of each quarter we had no trading residual
interests outstanding. Trading residual interests are the result of the initial securitization of
mortgage loans
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and are subsequently securitized in a NIM transaction. Mark-to-market adjustments on trading
residuals are included in gains on sales of mortgage assets on the condensed consolidated income
statement. Such adjustments resulted in a net loss of $1.4 million and a net gain of $0.6 million
for the three and nine months ended January 31, 2006, respectively. Similar adjustments resulted in
a net gain of $0.4 million and $5.4 million for the three and nine months ended January 31, 2005,
respectively. Cash flows from trading residuals of $12.9 million were received for the nine months
ended January 31, 2006 and are included in operating activities in the accompanying condensed
consolidated statement of cash flows. Accretion of trading residuals totaled $3.5 million and $5.9
million for the three and nine months ended January 31, 2006, respectively, and zero in the prior
year periods. There were no trading residuals recorded as of April 30, 2005.
Cash flows from available-for-sale residual interests of $74.9 million and $100.3 million were
received from the securitization trusts for the nine months ended January 31, 2006 and 2005,
respectively. Cash received on available-for-sale residual interests is included in
investing activities in the condensed consolidated statements of cash flows.
Aggregate net unrealized gains on residual interests not yet accreted into income totaled
$63.0 million at January 31, 2006 and $115.4 million at April 30, 2005. These unrealized gains are
recorded net of deferred taxes in other comprehensive income, and may be recognized in income in
future periods either through accretion or upon further securitization or sale of the related
residual interest.
Activity related to mortgage servicing rights (MSRs) consists of the following:
| (in 000s) | ||||||||
| Nine months ended January 31, | 2006 | 2005 | ||||||
Balance, beginning of period |
$ | 166,614 | $ | 113,821 | ||||
Additions |
196,245 | 94,569 | ||||||
Amortization |
(100,170 | ) | (60,616 | ) | ||||
Impairment |
(320 | ) | (263 | ) | ||||
Balance, end of period |
$ | 262,369 | $ | 147,511 | ||||
Additions to MSRs during fiscal year 2006 have increased primarily as a result of
higher origination volumes, higher average loan balances and higher interest rates. In
addition, during fiscal year 2006 we updated our assumptions used to value MSRs. The assumptions
were updated primarily to reflect lower servicing costs, in particular interest paid to bondholders
on monthly loan prepayments, and higher discount rates. These changes in assumptions increased the
weighted average value of MSRs recorded during the second and third quarters by approximately $17.0
million (0.14% of loans originated) and $10.0 million (0.11% of loans originated), respectively,
over the prior year. Estimated amortization of MSRs for fiscal years 2006 through 2010 is $140.5
million, $123.9 million, $61.0 million, $25.3 million and $11.8 million, respectively.
The key weighted average assumptions we used to estimate the cash flows and values of the
residual interests initially recorded during the nine months ended January 31, 2006 and 2005 are as
follows:
| Nine months ended January 31, | 2006 | 2005 | ||||||
Estimated credit losses |
2.85 | % | 2.72 | % | ||||
Discount rate |
20.34 | % | 25.00 | % | ||||
| Variable returns to third-party beneficial interest holders | LIBOR forward curve at closing | |||||||
The key weighted average assumptions we used to estimate the cash flows and values
of the residual interests and MSRs at January 31, 2006 and April 30, 2005 are as follows:
| January 31, 2006 | April 30, 2005 | |||||||
Estimated credit losses |
2.97 | % | 3.03 | % | ||||
Discount rate — residual interests |
21.60 | % | 21.01 | % | ||||
Discount rate — MSRs |
18.00 | % | 12.80 | % | ||||
| Variable returns to third-party beneficial interest holders | LIBOR forward curve at valuation date | |||||||
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We originate both adjustable and fixed rate mortgage loans. A key assumption used to
estimate the cash flows and values of the residual interests and MSRs is average annualized
prepayment speeds. Prepayment speeds include voluntary prepayments, involuntary prepayments and
scheduled principal payments. Prepayment rate assumptions are as follows:
| Prior to | Months Outstanding After | |||||||||||
| Initial Rate | Initial Rate Reset Date | |||||||||||
| Reset Date | Zero - 3 | Remaining Life | ||||||||||
Adjustable rate mortgage loans: |
||||||||||||
With prepayment penalties |
31 | % | 72 | % | 41 | % | ||||||
Without prepayment penalties |
35 | % | 52 | % | 35 | % | ||||||
Fixed rate mortgage loans: |
||||||||||||
With prepayment penalties |
30 | % | 48 | % | 38 | % | ||||||
For fixed rate mortgages without prepayment penalties, we use an average prepayment
rate of 32% over the life of the loans. Prepayment rate is projected based on actual paydown
including voluntary, involuntary and scheduled principal payments.
Expected static pool credit losses are as follows:
| Mortgage Loans Securitized in Fiscal Year | ||||||||||||||||||||||||
| Prior to 2002 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||
As of: |
||||||||||||||||||||||||
January 31, 2006 |
4.58 | % | 2.54 | % | 2.08 | % | 2.14 | % | 2.59 | % | 2.91 | % | ||||||||||||
October 31, 2005 |
4.52 | % | 2.49 | % | 2.05 | % | 2.16 | % | 2.93 | % | 2.84 | % | ||||||||||||
July 31, 2005 |
4.53 | % | 2.53 | % | 2.03 | % | 2.20 | % | 2.86 | % | 2.70 | % | ||||||||||||
April 30, 2005 |
4.52 | % | 2.53 | % | 2.08 | % | 2.30 | % | 2.83 | % | — | |||||||||||||
April 30, 2004 |
4.46 | % | 3.58 | % | 4.35 | % | 3.92 | % | — | — | ||||||||||||||
Static pool credit losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of assets.
At January 31, 2006, the sensitivities of the current fair value of the
residual interests and MSRs to 10% and 20% adverse changes in the above key assumptions are as
follows:
| (dollars in 000s) | ||||||||||||
| Residential Mortgage Loans | ||||||||||||
| NIM | Beneficial Interest | Servicing | ||||||||||
| Residuals | in Trusts | Assets | ||||||||||
Carrying amount/fair value |
$ | 175,068 | $ | 279,714 | $ | 262,369 | ||||||
Weighted average remaining life (in years) |
1.9 | 2.0 | 1.3 | |||||||||
Prepayments (including defaults): |
||||||||||||
Adverse 10% — $impact on fair value |
$ | 3,981 | $ | (12,497 | ) | $ | (35,910 | ) | ||||
Adverse 20% — $impact on fair value |
11,679 | (17,632 | ) | (60,158 | ) | |||||||
Credit losses: |
||||||||||||
Adverse 10% — $impact on fair value |
$ | (45,495 | ) | $ | (13,062 | ) | Not applicable | |||||
Adverse 20% — $impact on fair value |
(77,590 | ) | (23,942 | ) | Not applicable | |||||||
Discount rate: |
||||||||||||
Adverse 10% — $impact on fair value |
$ | (5,860 | ) | $ | (5,650 | ) | $ | (4,114 | ) | |||
Adverse 20% — $impact on fair value |
(11,333 | ) | (11,130 | ) | (8,112 | ) | ||||||
Variable interest rates (LIBOR forward curve): |
||||||||||||
Adverse 10% — $impact on fair value |
$ | (5,330 | ) | $ | (74,636 | ) | Not applicable | |||||
Adverse 20% — $impact on fair value |
(9,410 | ) | (147,357 | ) | Not applicable | |||||||
These sensitivities are hypothetical and should be used with caution. Changes
in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear. Also in
this table, the effect of a variation of a particular assumption on the fair value is calculated
without changing any other assumptions. It is likely that changes in one factor may result in
changes in another, which might magnify or counteract the sensitivities.
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Mortgage loans that have been securitized at January 31, 2006 and April 30, 2005, past due
sixty days or more and the related credit losses incurred are presented below:
| (in 000s) | ||||||||||||||||||||||||
| Total Principal | Principal Amount of | |||||||||||||||||||||||
| Amount of Loans | Loans 60 Days or | Credit Losses | ||||||||||||||||||||||
| Outstanding | More Past Due | (net of recoveries) | ||||||||||||||||||||||
| January 31, | April 30, | January 31, | April 30, | Three months ended | ||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | January 31, 2006 | April 30, 2005 | |||||||||||||||||||
Securitized mortgage
loans |
$ | 11,492,170 | $ | 10,300,805 | $ | 1,017,855 | $ | 1,128,376 | $ | 27,972 | $ | 21,641 | ||||||||||||
Mortgage loans in
warehouse Trusts |
11,209,456 | 6,742,387 | — | — | — | — | ||||||||||||||||||
Total loans |
$ | 22,701,626 | $ | 17,043,192 | $ | 1,017,855 | $ | 1,128,376 | $ | 27,972 | $ | 21,641 | ||||||||||||
| 7. | Goodwill and Intangible Assets | |
| Changes in the carrying amount of goodwill for the nine months ended January 31, 2006 consist of the following: |
| (in 000s) | ||||||||||||||||
| April 30, 2005 | Additions | Other | January 31, 2006 | |||||||||||||
Tax Services |
$ | 360,781 | $ | 8,829 | $ | 192 | $ | 369,802 | ||||||||
Mortgage Services |
152,467 | — | — | 152,467 | ||||||||||||
Business Services |
328,745 | 80,929 | (1,630 | ) | 408,044 | |||||||||||
Investment Services |
173,954 | — | — | 173,954 | ||||||||||||
Total goodwill |
$ | 1,015,947 | $ | 89,758 | $ | (1,438 | ) | $ | 1,104,267 | |||||||
We test goodwill for impairment annually at the beginning of our fourth quarter, or
more frequently if events occur indicating it is more likely than not the fair value of a reporting
unit’s net assets has been reduced below its carrying value. No such impairment or events
indicating impairment were identified within any of our segments during the nine months ended
January 31, 2006. Our evaluation of impairment is dependent upon various assumptions, including
assumptions regarding projected operating results and cash flows of reporting units. Actual results
could differ materially from our projections and those differences could alter our conclusions
regarding the fair value of a reporting unit and its goodwill.
Intangible assets consist of the following:
| (in 000s) | ||||||||||||||||||||||||
| January 31, 2006 | April 30, 2005 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Tax Services: |
||||||||||||||||||||||||
Customer relationships |
$ | 26,962 | $ | (9,751 | ) | $ | 17,211 | $ | 23,717 | $ | (7,207 | ) | $ | 16,510 | ||||||||||
Noncompete agreements |
18,961 | (16,135 | ) | 2,826 | 17,677 | (11,608 | ) | 6,069 | ||||||||||||||||
Business Services: |
||||||||||||||||||||||||
Customer relationships |
153,227 | (77,564 | ) | 75,663 | 130,585 | (68,433 | ) | 62,152 | ||||||||||||||||
Noncompete agreements |
32,483 | (13,431 | ) | 19,052 | 27,796 | (11,274 | ) | 16,522 | ||||||||||||||||
Trade name — amortizing |
4,050 | (1,481 | ) | 2,569 | 1,450 | (995 | ) | 455 | ||||||||||||||||
Trade name — non-amortizing |
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||
Investment Services: |
||||||||||||||||||||||||
Customer relationships |
293,000 | (225,854 | ) | 67,146 | 293,000 | (198,385 | ) | 94,615 | ||||||||||||||||
Total intangible assets |
$ | 584,320 | $ | (349,084 | ) | $ | 235,236 | $ | 549,862 | $ | (302,770 | ) | $ | 247,092 | ||||||||||
Amortization of intangible assets for the three and nine months ended January 31,
2006 was $16.7 million and $47.3 million, respectively. Amortization of intangible assets for the
three and nine months ended January 31, 2005 was $15.5 million and $45.9 million, respectively.
Estimated amortization of intangible assets for fiscal years 2006 through 2010 is $65.1 million,
$56.3 million, $38.4 million, $15.0 million and $12.8 million, respectively.
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The goodwill and intangible assets added in the Business Services segment relate primarily to
the acquisition of American Express Tax and Business Services, Inc., as discussed in note 3. The
intangible asset valuations were completed during the quarter, however, goodwill is subject to
change pending determination of the final purchase price.
| 8. | Derivative Instruments | |
| We enter into derivative instruments to reduce risks relating to mortgage loans we originate and sell, and therefore all gains or losses are included in gains on sales of mortgage assets, net in the condensed consolidated income statements. A summary of our derivative instruments as of January 31, 2006 and April 30, 2005, and gains or losses incurred during the three and nine months ended January 31, 2006 and 2005 is as follows: |
| (in 000s) | ||||||||||||||||||||||||
| Asset (Liability) Balance at | Gain (Loss) for the Three | Gain (Loss) for the Nine | ||||||||||||||||||||||
| January 31, | April 30, | Months Ended January 31, | Months Ended January 31, | |||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
Interest rate swaps |
$ | 23,422 | $ | (1,325 | ) | $ | 6,292 | $ | 31,039 | $ | 91,578 | $ | 28,934 | |||||||||||
Interest rate caps |
— | 12,458 | — | — | 802 | — | ||||||||||||||||||
Rate-lock equivalents |
96 | 801 | 34 | 141 | (705 | ) | 1,841 | |||||||||||||||||
Prime short sales |
(333 | ) | (805 | ) | (1,266 | ) | (424 | ) | 221 | (1,949 | ) | |||||||||||||
| $ | 23,185 | $ | 11,129 | $ | 5,060 | $ | 30,756 | $ | 91,896 | $ | 28,826 | |||||||||||||
We generally use interest rate swaps and forward loan sale commitments to reduce
interest rate risk associated with non-prime loans. We generally enter into interest rate swap
arrangements related to existing loan applications with rate-lock commitments and for rate-lock
commitments we expect to make in the next two to three weeks. Interest rate swaps represent an
agreement to exchange interest rate payments, whereby we pay a fixed rate and receive a floating
rate. As a result, these contracts increase in value as rates rise and decrease in value as rates
fall. The notional amount of interest rate swaps to which we were a party at January 31, 2006 was
$8.8 billion, with a weighted average duration of 1.9 years.
We generally enter into interest rate caps or swaps to mitigate interest rate risk associated
with mortgage loans that will be securitized and residual interests that are classified as trading
securities because they will be sold in a subsequent NIM transaction. These instruments enhance the
marketability of the securitization and NIM transactions. An interest rate cap represents a right
to receive cash if interest rates rise above a contractual strike rate, its value therefore
increases as interest rates rise. The interest rate used in our interest rate caps is based on
LIBOR.
We enter into forward loan commitments to sell our non-prime mortgage loans to manage interest
rate risk. The notional value and the contract value of the forward commitments at January 31, 2006
was $5.3 billion. Most of our forward commitments give us the option to under- or over-deliver by
five percent.
In the normal course of business, we enter into commitments with our customers to fund both
non-prime and prime mortgage loans for specified periods of time at “locked-in” interest rates.
These derivative instruments represent commitments to fund loans (“rate-lock equivalents”). The
fair value of non-prime loan commitments is calculated using a binomial option model, although we
do not initially record an asset for non-prime commitments to fund loans. The fair value of prime
loan commitments is calculated based on the current market pricing of short sales of FNMA, FHLMC
and GNMA mortgage-backed securities and the coupon rates of the eligible loans.
We sell short FNMA, FHLMC and GNMA mortgage-backed securities to reduce our risk related to
our commitments to fund fixed-rate prime loans. The position on certain or all of the fixed-rate
mortgage loans is closed approximately 10-15 days prior to standard Public Securities Association
(PSA) settlement dates.
None of our derivative instruments qualify for hedge accounting treatment as of January 31,
2006 or April 30, 2005.
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| 9. | Stock-Based Compensation | |
| Effective May 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), under the prospective transition method as described in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Had compensation cost for all stock-based compensation plan grants been determined in accordance with the fair value accounting method prescribed under SFAS 123, our net income (loss) and earnings (loss) per share would have been as follows: |
| (in 000s, except per share amounts) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Net income (loss) as reported |
$ | 12,113 | $ | 93,736 | $ | (97,130 | ) | $ | 8,980 | |||||||
Add: Stock-based compensation expense included in
reported net income (loss), net of related tax effects |
9,916 | 8,918 | 21,927 | 17,260 | ||||||||||||
Deduct: Total stock-based compensation expense
determined under fair value method for all
awards, net of related tax effects |
(12,460 | ) | (11,599 | ) | (29,558 | ) | (25,304 | ) | ||||||||
Pro forma net income (loss) |
$ | 9,569 | $ | 91,055 | $ | (104,761 | ) | $ | 936 | |||||||
Basic earnings (loss) per share: |
||||||||||||||||
As reported |
$ | 0.04 | $ | 0.28 | $ | (0.30 | ) | $ | 0.03 | |||||||
Pro forma |
0.03 | 0.28 | (0.32 | ) | — | |||||||||||
Diluted earnings (loss) per share: |
||||||||||||||||
As reported |
$ | 0.04 | $ | 0.28 | $ | (0.30 | ) | $ | 0.03 | |||||||
Pro forma |
0.03 | 0.27 | (0.32 | ) | — | |||||||||||
| 10. | Supplemental Cash Flow Information | |
| During the nine months ended January 31, 2006, we paid $224.8 million and $63.0 million for income taxes and interest, respectively. During the nine months ended January 31, 2005, we paid $406.6 million and $53.6 million for income taxes and interest, respectively. See note 3 for discussion of cash payments made, assets acquired and liabilities assumed related to our acquisition of American Express Tax and Business Services, Inc. |
The following transactions were treated as non-cash investing activities in the condensed
consolidated statement of cash flows:
| (in 000s) | ||||||||
| Nine months ended January 31, | 2006 | 2005 | ||||||
Residual interest mark-to-market |
$ | 38,930 | $ | 98,713 | ||||
Additions to residual interests |
39,378 | 16,470 | ||||||
| 11. | Commitments and Contingencies | |
| We maintain two unsecured committed lines of credit (CLOCs) for working capital, support of our commercial paper program and general corporate purposes. The two CLOCs are from a consortium of thirty-one banks and expire in August 2010. These lines are subject to various affirmative and negative covenants, including a minimum net worth covenant. These CLOCs were undrawn at January 31, 2006. |
We obtained an additional $900.0 million line of credit for the period of January 3 to
February 24, 2006 to back-up peak commercial paper issuance or use as an alternate source of
funding for RAL participations. This line is subject to various covenants, substantially similar to
the primary CLOCs. The balance outstanding on this facility at January 31, 2006 was $550.0 million.
As a result of our failure to file this Form 10-Q by the SEC’s prescribed due date, we will be
unable to issue any debt securities under our shelf registration statement for a period of twelve
calendar months after the month of our filing.
We offer guarantees under our Peace of Mind (POM) program to tax clients whereby we will
assume the cost of additional taxes attributable to tax return preparation errors for which we are
responsible. We defer all revenues and direct costs associated with these guarantees, recognizing
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these amounts over the term of the guarantee based upon historic and actual payment of claims.
Changes in the deferred revenue liability are as follows:
| (in 000s) | ||||||||
| Nine months ended January 31, | 2006 | 2005 | ||||||
Balance, beginning of period |
$ | 130,762 | $ | 123,048 | ||||
Amounts deferred for new guarantees issued |
20,533 | 19,925 | ||||||
Revenue recognized on previous deferrals |
(55,932 | ) | (52,295 | ) | ||||
Balance, end of period |
$ | 95,363 | $ | 90,678 | ||||
We have commitments to fund mortgage loans to customers as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses. The commitments to fund loans amounted to $2.9 billion and $3.9
billion at January 31, 2006 and April 30, 2005, respectively. Of these commitments, $697.3 million
and $947.5 million are considered binding commitments as of January 31, 2006 and April 30, 2005,
respectively. External market forces impact the probability of commitments being exercised, and
therefore, total commitments outstanding do not necessarily represent future cash requirements.
We have entered into loan sale agreements with investors in the normal course of business,
which include standard representations and warranties customary to the mortgage banking industry.
Violations of these representations and warranties may require us to repurchase loans previously
sold. A liability has been established related to the potential loss on repurchase of loans
previously sold of $40.9 million and $41.2 million at January 31, 2006 and April 30, 2005,
respectively, based on historical experience. Repurchased loans are normally sold in subsequent
sale transactions.
Option One Mortgage Corporation provides a guarantee up to a maximum amount equal to
approximately 10% of the aggregate principal balance of mortgage loans held by the Trusts before
ultimate disposition of the loans. This guarantee would be called upon in the event adequate
proceeds were not available from the sale of the mortgage loans by the Trusts to satisfy their
payment obligations. No losses have been sustained on this commitment since its inception. The
total principal amount of Trust obligations outstanding as of January 31, 2006 and April 30, 2005
was $11.2 billion and $6.7 billion, respectively. The fair value of mortgage loans held by the
Trusts as of January 31, 2006 and April 30, 2005 was $11.4 billion and $6.8 billion, respectively.
We have various contingent purchase price obligations in connection with prior acquisitions.
In many cases, contingent payments to be made in connection with these acquisitions are not subject
to a stated limit. We estimate the potential payments (undiscounted) total approximately $13.8
million and $5.1 million as of January 31, 2006 and April 30, 2005, respectively. 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. Such payments, if and when
paid, would be recorded as additional cost of the acquired business, generally goodwill.
We have contractual commitments to fund certain franchises requesting draws on Franchise
Equity Lines of Credit (FELCs). Our commitment to fund FELCs as of January 31, 2006 and April 30,
2005 totaled $75.9 million and $68.9 million, respectively. We have a receivable of $60.2 million
and $39.0 million, which represents the amounts drawn on the FELCs, as of January 31, 2006 and
April 30, 2005, respectively.
We routinely enter into contracts that include embedded indemnifications that have
characteristics similar to guarantees, including obligations to protect counterparties from losses
arising from the following: (a) tax, legal and other risks related to the purchase or disposition
of businesses; (b) penalties and interest assessed by Federal and state taxing authorities in
connection with tax returns prepared for clients; (c) indemnification of our directors and
officers; and (d) 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
term of 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 that
such claims will not be successfully
asserted, we believe the fair value of these guarantees and indemnifications is not material as of
January 31, 2006.
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| 12. | Litigation Commitments and Contingencies | |
| We have been involved in a number of class actions and putative class action cases since 1990, as well as a state attorney general lawsuit, regarding our RAL programs. These cases are based on a variety of legal theories and allegations. These theories and allegations include, among others, that (i) we improperly did not disclose license fees we received from RAL lending banks for RALs they make to our clients, (ii) we owe and breached a fiduciary duty to our clients and (iii) the RAL program violates laws such as state credit service organization laws and the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. Although we have successfully defended many RAL cases, we have settled others. On December 21, 2005, we entered into a settlement agreement regarding four RAL cases, subject to final court approval. Pursuant to the terms of this settlement agreement, we will contribute a total of up to $62.5 million in cash for purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class counsel and covering service awards to the representative plaintiffs. In addition, we will pay costs for providing notice of the settlement to settlement class members. We recorded a reserve of $52.2 million related to this settlement in our third quarter. Two RAL class action cases and the state attorney general lawsuit are still pending, with the amounts claimed on a collective basis being very substantial. The ultimate cost of this litigation could be substantial, and in March 2006, we increased our reserves as of January 31, 2006 by an additional $19.5 million related to one of the other RAL cases. We intend to continue defending the other RAL cases vigorously, although there are no assurances as to their outcome. |
We are also a party to claims and lawsuits pertaining to our electronic tax return filing
services, our POM guarantee program, and our Express IRA product. These claims and lawsuits include
actions by individual plaintiffs, as well as cases in which plaintiffs seek to represent a class of
similarly situated customers. In addition we are party to two shareholder derivative actions
stemming from our recent financial restatement as well as separate putative class actions alleging
violations of certain securities laws. The amounts claimed in these claims and lawsuits are
substantial in some instances, and the ultimate liability with respect to such litigation and
claims is difficult to predict. We intend to continue defending these cases vigorously, although
there are no assurances as to their outcome.
In addition to the aforementioned types of cases, we are parties to claims and lawsuits that
we consider to be ordinary, routine disputes incidental to our business (Other Claims and
Lawsuits), including claims and lawsuits concerning the preparation of customers’ income tax
returns, the fees charged customers for various services, investment products, relationships with
franchisees, contract disputes, employment matters and civil actions, arbitrations, regulatory
inquiries and class actions arising out of our business as a broker-dealer and provider of
investment products and as a servicer of mortgage loans. We believe we have meritorious defenses to
each of the Other Claims and Lawsuits and are defending them vigorously. Although we cannot provide
assurance we will ultimately prevail in each instance, we believe that amounts, if any, required to
be paid in the discharge of liabilities or settlements pertaining to Other Claims and Lawsuits will
not have a material adverse effect on our consolidated financial statements. Regardless of outcome,
claims and litigation can adversely affect us due to defense costs, diversion of management
attention and time, and publicity related to such matters.
It is our policy to accrue for amounts related to legal matters if it is probable that a
liability has been incurred and the amount of the liability can be reasonably estimated. Many of
the various legal proceedings are covered in whole or in part by insurance. Any receivable for
insurance recoveries is recorded separately from the corresponding litigation reserve, and only if
recovery is determined to be probable. Receivables for insurance recoveries at January 31, 2006
were immaterial.
-15-
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| 13. | Segment Information | |
| Information concerning our operations by reportable operating segment is as follows: |
| (in 000s) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues: |
||||||||||||||||
Tax Services |
$ | 548,494 | $ | 531,086 | $ | 686,498 | $ | 655,639 | ||||||||
Mortgage Services |
296,493 | 308,872 | 943,082 | 865,177 | ||||||||||||
Business Services |
235,840 | 132,872 | 529,491 | 371,021 | ||||||||||||
Investment Services |
73,176 | 62,104 | 211,177 | 169,446 | ||||||||||||
Corporate |
2,744 | 1,302 | 6,535 | 3,457 | ||||||||||||
| $ | 1,156,747 | $ | 1,036,236 | $ | 2,376,783 | $ | 2,064,740 | |||||||||
Pretax income (loss): |
||||||||||||||||
Tax Services |
$ | (6,332 | ) | $ | 63,655 | $ | (293,702 | ) | $ | (182,923 | ) | |||||
Mortgage Services |
67,453 | 115,483 | 248,160 | 332,980 | ||||||||||||
Business Services |
(1,035 | ) | 5,916 | (9,943 | ) | (9,021 | ) | |||||||||
Investment Services |
(7,668 | ) | (19,775 | ) | (23,126 | ) | (60,882 | ) | ||||||||
Corporate |
(27,010 | ) | (12,001 | ) | (74,979 | ) | (65,494 | ) | ||||||||
Income (loss) before taxes |
$ | 25,408 | $ | 153,278 | $ | (153,590 | ) | $ | 14,660 | |||||||
Pretax results from our Tax Services segment for the three and nine months ended
January 31, 2006 includes a $71.7 million provision for legal reserves and related litigation fees,
as discussed in note 12.
| 14. | New Accounting Pronouncements | |
| In February 2006, Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), an amendment of FASB Statements No. 133 and 140, was issued. The provisions of this standard allow financial instruments that have embedded derivatives to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. The new standard also amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The provisions of this standard are effective as of the beginning of our fiscal year 2008. Our residual interests typically have interests in derivative instruments embedded within the securitization trusts. If we elect to account for our residual interests on a fair value basis, changes in fair value will impact earnings in the period in which the change occurs. We are currently evaluating what effect the adoption of SFAS 155 will have on our consolidated financial statements. |
In March 2006, Statement of Financial Accounting Standards No. 156, “Accounting for Servicing
of Financial Assets — An Amendment of FASB Statement No. 140,” (SFAS 156), was issued. The
provisions of this standard require mortgage servicing rights to be initially valued at fair value.
SFAS 156 also allows servicers to choose to measure their servicing rights at fair value or to
continue using the “amortization method” under SFAS 140. The provisions of this standard are
effective as of the beginning of our fiscal year 2008. We are currently evaluating what effect the
adoption of SFAS 156 will have on our consolidated financial statements.
Exposure Draft — Amendment of SFAS 140
In August 2005, the Financial Accounting Standards Board (FASB) issued an exposure draft which
amends Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities.”
This exposure draft seeks to clarify the derecognition requirements for financial assets and
the initial measurement of interests related to transferred financial assets that are held by a
transferor. Our current off-balance sheet warehouse facilities (the Trusts) in our Mortgage
Services segment would be required to be consolidated in our financial statements based on the
provisions of the
-16-
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exposure draft. We will continue to monitor the status of the exposure draft and consider what
changes, if any, could be made to the structure of the Trusts to continue to derecognize mortgage
loans transferred to the Trusts. At January 31, 2006, the Trusts held loans totaling $11.2 billion,
which we would be required to consolidate into our financial statements under the provisions of
this exposure draft.
The final standard for this exposure draft is scheduled to be issued in the second quarter of
calendar year 2006.
| 15. | Condensed Consolidating Financial Statements | |
| Block Financial Corporation (BFC) is an indirect, wholly owned consolidated subsidiary of the Company. BFC is the Issuer and the Company is the Guarantor of the Senior Notes issued on April 13, 2000 and October 26, 2004. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholder’s equity and other intercompany balances and transactions. |
| Condensed Consolidating Income Statements | (in 000s) | |||||||||||||||||||
| Three months ended | H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||
| January 31, 2006 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues |
$ | — | $ | 492,631 | $ | 667,754 | $ | (3,638 | ) | $ | 1,156,747 | |||||||||
Cost of services |
— | 136,863 | 497,035 | 29 | 633,927 | |||||||||||||||
Cost of other revenues |
— | 124,037 | 20,626 | — | 144,663 | |||||||||||||||
Selling, general and administrative |
— | 127,185 | 220,728 | (3,667 | ) | 344,246 | ||||||||||||||
Total expenses |
— | 388,085 | 738,389 | (3,638 | ) | 1,122,836 | ||||||||||||||
Operating income (loss) |
— | 104,546 | (70,635 | ) | — | 33,911 | ||||||||||||||
Interest expense |
— | 11,810 | 401 | — | 12,211 | |||||||||||||||
Other income, net |
25,408 | — | 3,708 | (25,408 | ) | 3,708 | ||||||||||||||
Income (loss) before taxes |
25,408 | 92,736 | (67,328 | ) | (25,408 | ) | 25,408 | |||||||||||||
Income taxes (benefit) |
13,295 | 37,505 | (24,210 | ) | (13,295 | ) | 13,295 | |||||||||||||
Net income (loss) |
$ | 12,113 | $ | 55,231 | $ | (43,118 | ) | $ | (12,113 | ) | $ | 12,113 | ||||||||
| Three months ended | H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||
| January 31, 2005 (Restated) | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues |
$ | — | $ | 446,508 | $ | 593,396 | $ | (3,668 | ) | $ | 1,036,236 | |||||||||
Cost of services |
— | 104,561 | 403,715 | (69 | ) | 508,207 | ||||||||||||||
Cost of other revenues |
— | 114,759 | 18,584 | — | 133,343 | |||||||||||||||
Selling, general and administrative |
— | 91,939 | 159,774 | (3,599 | ) | 248,114 | ||||||||||||||
Total expenses |
— | 311,259 | 582,073 | (3,668 | ) | 889,664 | ||||||||||||||
Operating income (loss) |
— | 135,249 | 11,323 | — | 146,572 | |||||||||||||||
Interest expense |
— | 12,180 | 846 | — | 13,026 | |||||||||||||||
Other income, net |
153,278 | — | 19,732 | (153,278 | ) | 19,732 | ||||||||||||||
Income before taxes |
153,278 | 123,069 | 30,209 | (153,278 | ) | 153,278 | ||||||||||||||
Income taxes |
59,542 | 54,578 | 4,964 | (59,542 | ) | 59,542 | ||||||||||||||
Net income |
$ | 93,736 | $ | 68,491 | $ | 25,245 | $ | (93,736 | ) | $ | 93,736 | |||||||||
-17-
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| Nine months ended | H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||
| January 31, 2006 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues |
$ | — | $ | 1,349,096 | $ | 1,038,594 | $ | (10,907 | ) | $ | 2,376,783 | |||||||||
Cost of service revenues |
— | 362,034 | 1,002,167 | 161 | 1,364,362 | |||||||||||||||
Cost of other revenues |
— | 374,253 | 28,631 | — | 402,884 | |||||||||||||||
Selling, general and administrative |
— | 315,333 | 435,782 | (11,068 | ) | 740,047 | ||||||||||||||
Total expenses |
— | 1,051,620 | 1,466,580 | (10,907 | ) | 2,507,293 | ||||||||||||||
Operating income (loss) |
— | 297,476 | (427,986 | ) | — | (130,510 | ) | |||||||||||||
Interest expense |
— | 35,431 | 1,600 | — | 37,031 | |||||||||||||||
Other income, net |
(153,590 | ) | — | 13,951 | 153,590 | 13,951 | ||||||||||||||
Income (loss) before taxes |
(153,590 | ) | 262,045 | (415,635 | ) | 153,590 | (153,590 | ) | ||||||||||||
Income taxes (benefit) |
(56,460 | ) | 103,536 | (159,996 | ) | 56,460 | (56,460 | ) | ||||||||||||
Net income (loss) |
$ | (97,130 | ) | $ | 158,509 | $ | (255,639 | ) | $ | 97,130 | $ | (97,130 | ) | |||||||
| Nine months ended | H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||
| January 31, 2005 (Restated) | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues |
$ | — | $ | 1,115,976 | $ | 959,051 | $ | (10,287 | ) | $ | 2,064,740 | |||||||||
Cost of services |
— | 291,531 | 831,695 | 40 | 1,123,266 | |||||||||||||||
Cost of other revenues |
— | 282,504 | 25,483 | — | 307,987 | |||||||||||||||
Selling, general and administrative |
— | 235,581 | 367,923 | (10,327 | ) | 593,177 | ||||||||||||||
Total expenses |
— | 809,616 | 1,225,101 | (10,287 | ) | 2,024,430 | ||||||||||||||
Operating income (loss) |
— | 306,360 | (266,050 | ) | — | 40,310 | ||||||||||||||
Interest expense |
— | 46,330 | 2,570 | — | 48,900 | |||||||||||||||
Other income, net |
14,660 | — | 23,250 | (14,660 | ) | 23,250 | ||||||||||||||
Income (loss) before taxes |
14,660 | 260,030 | (245,370 | ) | (14,660 | ) | 14,660 | |||||||||||||
Income taxes (benefit) |
5,680 | 108,061 | (102,381 | ) | (5,680 | ) | 5,680 | |||||||||||||
Net income (loss) |
$ | 8,980 | $ | 151,969 | $ | (142,989 | ) | $ | (8,980 | ) | $ | 8,980 | ||||||||
| Condensed Consolidating Balance Sheets |
| (in 000s) | |||||||||||||||||||||
| H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||||
| January 31, 2006 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | ||||||||||||||||
Cash & cash equivalents |
$ | — | $ | 286,226 | $ | 1,173,954 | $ | — | $ | 1,460,180 | |||||||||||
Cash & cash equivalents — restricted |
— | 424,115 | 6,598 | — | 430,713 | ||||||||||||||||
Receivables from customers,
brokers and dealers, net |
— | 569,430 | — | — | 569,430 | ||||||||||||||||
Receivables, net |
747 | 1,316,571 | 493,627 | — | 1,810,945 | ||||||||||||||||
Intangible assets and goodwill, net |
— | 396,397 | 943,106 | — | 1,339,503 | ||||||||||||||||
Investments in subsidiaries |
4,685,740 | 219 | 521 | (4,685,740 | ) | 740 | |||||||||||||||
Other assets |
— | 1,613,833 | 447,023 | (26 | ) | 2,060,830 | |||||||||||||||
Total assets |
$ | 4,686,487 | $ | 4,606,791 | $ | 3,064,829 | $ | (4,685,766 | ) | $ | 7,672,341 | ||||||||||
Commercial paper |
$ | — | $ | 2,575,756 | $ | 20,192 | $ | — | $ | 2,595,948 | |||||||||||
Accts. payable to customers,
brokers and dealers |
— | 851,827 | — | — | 851,827 | ||||||||||||||||
Long-term debt |
— | 897,217 | 19,709 | — | 916,926 | ||||||||||||||||
Other liabilities |
2 | 600,609 | 1,119,076 | — | 1,719,687 | ||||||||||||||||
Net intercompany advances |
3,098,532 | (1,976,900 | ) | (1,121,606 | ) | (26 | ) | — | |||||||||||||
Stockholders’ equity |
1,587,953 | 1,658,282 | 3,027,458 | (4,685,740 | ) | 1,587,953 | |||||||||||||||
Total liabilities and
stockholders’ equity |
$ | 4,686,487 | $ | 4,606,791 | $ | 3,064,829 | $ | (4,685,766 | ) | $ | 7,672,341 | ||||||||||
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Table of Contents
| H&R Block, Inc. | BFC | Other | Consolidated | |||||||||||||||||
| April 30, 2005 (Restated) | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents |
$ | — | $ | 162,983 | $ | 937,230 | $ | — | $ | 1,100,213 | ||||||||||
Cash & cash equivalents — restricted |
— | 488,761 | 28,148 | — | 516,909 | |||||||||||||||
Receivables from customers,
brokers and dealers, net |
— | 590,226 | — | — | 590,226 | |||||||||||||||
Receivables, net |
101 | 199,990 | 218,697 | — | 418,788 | |||||||||||||||
Intangible assets and goodwill, net |
— | 421,036 | 842,003 | — | 1,263,039 | |||||||||||||||
Investments in subsidiaries |
4,851,680 | 210 | 449 | (4,851,680 | ) | 659 | ||||||||||||||
Other assets |
— | 1,407,082 | 241,532 | (392 | ) | 1,648,222 | ||||||||||||||
Total assets |
$ | 4,851,781 | $ | 3,270,288 | $ | 2,268,059 | $ | (4,852,072 | ) | $ | 5,538,056 | |||||||||
Accts. payable to customers,
brokers and dealers |
$ | — | $ | 950,684 | $ | — | $ | — | $ | 950,684 | ||||||||||
Long-term debt |
— | 896,591 | 26,482 | — | 923,073 | |||||||||||||||
Other liabilities |
2 | 532,562 | 1,182,459 | 8 | 1,715,031 | |||||||||||||||
Net intercompany advances |
2,902,511 | (641,611 | ) | (2,262,818 | ) | 1,918 | — | |||||||||||||
Stockholders’ equity |
1,949,268 | 1,532,062 | 3,321,936 | (4,853,998 | ) | 1,949,268 | ||||||||||||||
Total liabilities and
stockholders’ equity |
$ | 4,851,781 | $ | 3,270,288 | $ | 2,268,059 | $ | (4,852,072 | ) | $ | 5,538,056 | |||||||||
Condensed Consolidating Statements of Cash Flows
| (in 000s) | ||||||||||||||||||||
| Nine months ended | H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||
| January 31, 2006 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash provided by (used in)
operating activities: |
$ | 43,228 | $ | (1,193,527 | ) | $ | (539,248 | ) | $ | — | $ | (1,689,547 | ) | |||||||
Cash flows from investing: |
||||||||||||||||||||
Cash received on residuals |
— | 74,931 | — | — | 74,931 | |||||||||||||||
Cash received on sale of residuals |
— | 30,497 | — | — | 30,497 | |||||||||||||||
Purchase property & equipment |
— | (31,627 | ) | (135,554 | ) | — | (167,181 | ) | ||||||||||||
Payments for business acquisitions |
— | (3,140 | ) | (206,676 | ) | — | (209,816 | ) | ||||||||||||
Net intercompany advances |
229,755 | — | — | (229,755 | ) | — | ||||||||||||||
Other, net |
— | — | 17,297 | — | 17,297 | |||||||||||||||
Net cash provided by (used in)
investing activities |
229,755 | 70,661 | (324,933 | ) | (229,755 | ) | (254,272 | ) | ||||||||||||
Cash flows from financing: |
||||||||||||||||||||
Repayments of commercial paper |
— | (2,610,432 | ) | (22,012 | ) | — | (2,632,444 | ) | ||||||||||||
Proceeds from commercial paper |
— | 4,636,188 | 42,204 | — | 4,678,392 | |||||||||||||||
Proceeds from short-term borrowings |
— | 550,000 | — | — | 550,000 | |||||||||||||||
Dividends paid |
(118,665 | ) | — | — | — | (118,665 | ) | |||||||||||||
Acquisition of treasury shares |
(260,078 | ) | — | — | — | (260,078 | ) | |||||||||||||
Proceeds from common stock |
105,760 | — | — | — | 105,760 | |||||||||||||||
Net intercompany advances |
— | (1,335,289 | ) | 1,105,534 | 229,755 | — | ||||||||||||||
Other, net |
— | 5,642 | (24,821 | ) | — | (19,179 | ) | |||||||||||||
Net cash provided by (used in)
financing activities |
(272,983 | ) | 1,246,109 | 1,100,905 | 229,755 | 2,303,786 | ||||||||||||||
Net increase in cash |
— | 123,243 | 236,724 | — | 359,967 | |||||||||||||||
Cash — beginning of period |
— | 162,983 | 937,230 | — | 1,100,213 | |||||||||||||||
Cash — end of period |
$ | — | $ | 286,226 | $ | 1,173,954 | $ | — | $ | 1,460,180 | ||||||||||
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Table of Contents
| Nine months ended | H&R Block, Inc. | BFC | Other | Consolidated | ||||||||||||||||
| January 31, 2005 (Restated) | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash provided by (used in)
operating activities: |
$ | 16,683 | $ | (840,959 | ) | $ | (740,157 | ) | $ | — | $ | (1,564,433 | ) | |||||||
Cash flows from investing: |
||||||||||||||||||||
Cash received on residuals |
— | 100,344 | — | — | 100,344 | |||||||||||||||
Purchase property & equipment |
— | (28,104 | ) | (115,128 | ) | — | (143,232 | ) | ||||||||||||
Payments for business acquisitions |
— | — | (26,348 | ) | — | (26,348 | ) | |||||||||||||
Net intercompany advances |
499,699 | — | — | (499,699 | ) | — | ||||||||||||||
Other, net |
— | (152 | ) | 15,359 | — | 15,207 | ||||||||||||||
Net cash provided by (used in)
investing activities |
499,699 | 72,088 | (126,117 | ) | (499,699 | ) | (54,029 | ) | ||||||||||||
Cash flows from financing: |
||||||||||||||||||||
Repayments of commercial paper |
— | (2,348,966 | ) | — | — | (2,348,966 | ) | |||||||||||||
Proceeds from commercial paper |
— | 3,857,750 | 20,098 | — | 3,877,848 | |||||||||||||||
Repayments of long-term debt |
— | (250,000 | ) | — | — | (250,000 | ) | |||||||||||||
Proceeds from long-term debt |
— | 395,221 | — | — | 395,221 | |||||||||||||||
Dividends paid |
(106,422 | ) | — | — | — | (106,422 | ) | |||||||||||||
Acquisition of treasury shares |
(529,852 | ) | — | — | — | (529,852 | ) | |||||||||||||
Proceeds from common stock |
119,892 | — | — | — | 119,892 | |||||||||||||||
Net intercompany advances |
— | (880,648 | ) | 380,949 | 499,699 | — | ||||||||||||||
Other, net |
— | — | (35,414 | ) | — | (35,414 | ) | |||||||||||||
Net cash provided by (used in)
financing activities |
(516,382 | ) | 773,357 | 365,633 | 499,699 | 1,122,307 | ||||||||||||||
Net increase (decrease) in cash |
— | 4,486 | (500,641 | ) | — | (496,155 | ) | |||||||||||||
Cash — beginning of period |
— | 133,188 | 939,557 | — | 1,072,745 | |||||||||||||||
Cash — end of period |
$ | — | $ | 137,674 | $ | 438,916 | $ | — | $ | 576,590 | ||||||||||
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Table of Contents
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF OPERATIONS
H&R Block is a diversified company delivering tax services and financial advice, investment
and mortgage services, and business and consulting services. For 50 years, we have been developing
relationships with millions of tax clients and our strategy is to expand on these relationships.
Our Tax Services segment provides income tax return preparation services, electronic filing
services and other services and products related to income tax return preparation to the general
public in the United States, Canada, Australia and the United Kingdom. We also offer investment
services through H&R Block Financial Advisors, Inc. (HRBFA). Our Mortgage Services segment offers a
full range of home mortgage services through Option One Mortgage Corporation (OOMC) and H&R Block
Mortgage Corporation (HRBMC). RSM McGladrey Business Services, Inc. (RSM), together with its
attest-firm affiliations, is the fifth largest national accounting, tax and consulting firm
primarily serving mid-sized businesses.
Our Mission
To help our clients achieve their financial objectives
by serving as their tax and financial partner.
To help our clients achieve their financial objectives
by serving as their tax and financial partner.
Key to achieving our mission is the enhancement of client experiences through consistent
delivery of valuable services and advice. Operating through multiple lines of business allows us to
better meet the changing financial needs of our clients.
The accompanying Management’s Discussion and Analysis of Financial Condition and Results of
Operations reflects the restatements of previously issued financial statements, as discussed in
note 2 to our condensed consolidated financial statements. The analysis that follows should be read
in conjunction with the tables below and the condensed consolidated income statements found on page
2.
Consolidated H&R Block, Inc. — Operating Results
| (in 000s, except per share amounts) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues: |
||||||||||||||||
Tax Services |
$ | 548,494 | $ | 531,086 | $ | 686,498 | $ | 655,639 | ||||||||
Mortgage Services |
296,493 | 308,872 | 943,082 | 865,177 | ||||||||||||
Business Services |
235,840 | 132,872 | 529,491 | 371,021 | ||||||||||||
Investment Services |
73,176 | 62,104 | 211,177 | 169,446 | ||||||||||||
Corporate |
2,744 | 1,302 | 6,535 | 3,457 | ||||||||||||
| $ | 1,156,747 | $ | 1,036,236 | $ | 2,376,783 | $ | 2,064,740 | |||||||||
Pretax income (loss): |
||||||||||||||||
Tax Services |
$ | (6,332 | ) | $ | 63,655 | $ | (293,702 | ) | $ | (182,923 | ) | |||||
Mortgage Services |
67,453 | 115,483 | 248,160 | 332,980 | ||||||||||||
Business Services |
(1,035 | ) | 5,916 | (9,943 | ) | (9,021 | ) | |||||||||
Investment Services |
(7,668 | ) | (19,775 | ) | (23,126 | ) | (60,882 | ) | ||||||||
Corporate |
(27,010 | ) | (12,001 | ) | (74,979 | ) | (65,494 | ) | ||||||||
| 25,408 | 153,278 | (153,590 | ) | 14,660 | ||||||||||||
Income taxes (benefit) |
13,295 | 59,542 | (56,460 | ) | 5,680 | |||||||||||
Net income (loss) |
$ | 12,113 | $ | 93,736 | $ | (97,130 | ) | $ | 8,980 | |||||||
Basic and diluted earnings
(loss) per share |
$ | 0.04 | $ | 0.28 | $ | (0.30 | ) | $ | 0.03 | |||||||
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TAX SERVICES
This segment primarily consists of our income tax preparation businesses — retail, online and
software.
Tax Services — Operating Statistics (U.S. only)
| Period January 1 through January 31, | ||||||||
| 2006 | 2005 | |||||||
Clients served (in 000s): |
||||||||
Company-owned operations |
2,372 | 2,447 | ||||||
Franchise operations |
1,398 | 1,406 | ||||||
| 3,770 | 3,853 | |||||||
Average fee per client served: (1) |
||||||||
Company-owned operations |
$ | 160.19 | $ | 149.94 | ||||
Franchise operations |
137.06 | 130.82 | ||||||
| $ | 151.61 | $ | 142.97 | |||||
Refund anticipation loans (RALs) (in 000s): |
||||||||
Company-owned operations |
1,149 | 1,197 | ||||||
Franchise operations |
716 | 714 | ||||||
| 1,865 | 1,911 | |||||||
Offices: |
||||||||
Company-owned |
6,387 | 5,811 | ||||||
Company-owned shared locations (2) |
1,473 | 1,296 | ||||||
Total company-owned offices |
7,860 | 7,107 | ||||||
Franchise |
3,703 | 3,528 | ||||||
Franchise shared locations (2) |
602 | 526 | ||||||
Total franchise offices |
4,305 | 4,054 | ||||||
| 12,165 | 11,161 | |||||||
| (1) | Calculated as tax preparation and related fees divided by clients served. |
|
| (2) | Shared locations include offices located within Wal-Mart, Sears and other third-party businesses. |
Tax Services — Operating Results
| (in 000s) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Service revenues: |
||||||||||||||||
Tax preparation and related fees |
$ | 389,040 | $ | 375,346 | $ | 452,862 | $ | 428,323 | ||||||||
Online tax services |
7,057 | 10,739 | 8,310 | 12,048 | ||||||||||||
Other services |
25,459 | 23,623 | 85,437 | 76,682 | ||||||||||||
| 421,556 | 409,708 | 546,609 | 517,053 | |||||||||||||
Royalties |
53,706 | 50,920 | 60,263 | 56,271 | ||||||||||||
RAL participation fees |
42,616 | 43,354 | 42,893 | 43,520 | ||||||||||||
Software sales |
16,914 | 18,072 | 19,123 | 20,779 | ||||||||||||
Other |
13,702 | 9,032 | 17,610 | 18,016 | ||||||||||||
Total revenues |
548,494 | 531,086 | 686,498 | 655,639 | ||||||||||||
Cost of services: |
||||||||||||||||
Compensation and benefits |
193,410 | 184,282 | 283,562 | 258,205 | ||||||||||||
Occupancy |
79,516 | 74,951 | 201,112 | 178,078 | ||||||||||||
Depreciation |
11,132 | 14,908 | 31,629 | 33,522 | ||||||||||||
Other |
51,030 | 53,385 | 123,965 | 122,734 | ||||||||||||
| 335,088 | 327,526 | 640,268 | 592,539 | |||||||||||||
Cost of software sales |
10,864 | 13,248 | 17,601 | 20,400 | ||||||||||||
Provision for RAL litigation |
71,700 | — | 71,700 | — | ||||||||||||
Selling, general and administrative |
137,174 | 126,657 | 250,631 | 225,623 | ||||||||||||
Total expenses |
554,826 | 467,431 | 980,200 | 838,562 | ||||||||||||
Pretax income (loss) |
$ | (6,332 | ) | $ | 63,655 | $ | (293,702 | ) | $ | (182,923 | ) | |||||
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Three months ended January 31, 2006 compared to January 31, 2005
Tax Services’ revenues increased $17.4 million, or 3.3%, for the three months ended January 31,
2006 compared to the prior year.
Tax preparation and related fees increased $13.7 million, or 3.6%, for the current quarter.
This increase is primarily due to an increase of 6.8% in the average fee per U.S. client served,
partially offset by a decrease of 3.2% in U.S. clients served in company-owned offices. The
decrease in clients served was partially due to a number of technology problems that severely hurt
the start of our filing season coupled with increased competition due to competitors’ refund
lending products.
Online tax service revenue declined $3.7 million, or 34.3%, primarily due to planned
reductions in unit prices.
Royalty revenue increased $2.8 million, or 5.5%, due to a 4.8% increase in the average fee
slightly offset by a 0.4% decline in clients served in franchise offices.
Other revenues increased $4.7 million primarily due to an increase in supply sales to
franchises during the current quarter.
Total expenses increased $87.4 million, or 18.7%, primarily due to $71.7 million of legal
reserves and related litigation fees recorded in the current period. During the current quarter we
entered into a settlement agreement regarding four separate RAL cases covering 22 states. As a
result of this settlement agreement, we recorded a pretax charge of $52.2 million, or $0.10 per
diluted share, for the unreserved cost of the proposed litigation settlement and related fees. In
March 2006, we engaged in settlement negotiations with
plaintiffs in another RAL case and accordingly increased our reserves as of January 31, 2006 and
recorded a pretax charge of $19.5 million. See additional discussion below and in note 12 to the
condensed consolidated financial statements.
Cost of services for the three months ended January 31, 2006 increased $7.6 million, or 2.3%,
from the prior year. Our real estate expansion efforts have contributed to a total increase of
$13.0 million across all cost of services categories. Compensation and benefits increased $9.1
million, or 5.0%, primarily due to an increase in staff needed for our new offices and the addition
of costs related to our small business initiatives in the current year. Occupancy expenses
increased $4.6 million, or 6.1%, primarily as a result of higher rent expenses, due to a 9.6%
increase in company-owned offices under lease and a 7.5% increase in the average rent. Depreciation
declined $3.8 million, or 25.3%, primarily due to decreased capital expenditures compared to the
prior year and the timing of certain depreciation expenses. Other cost of services declined $2.4
million, or 4.4%, due to a decline of $3.4 million in corporate shared services and lower expenses
associated with our POM guarantee, partially offset by an increase of $3.8 million in supplies
expenses.
Selling, general and administrative expenses increased $10.5 million, or 8.3%, primarily due
to a $9.7 million increase in corporate shared services, $6.6 million of which was related to our
marketing efforts. We also incurred higher costs associated with increased supply sales to
franchises and additional costs related to our small business initiatives in the current year.
The pretax loss was $6.3 million for the three months ended January 31, 2006 compared to
income of $63.7 million in the prior year.
Due to the seasonal nature of this segment’s business, operating results for the three months
ended January 31, 2006 are not comparable to the three months ended October 31, 2005 and are not
indicative of the expected results for the entire fiscal year.
Nine months ended January 31, 2006 compared to January 31, 2005
Tax Services’ revenues increased $30.9 million, or 4.7%, for the nine months ended January 31, 2006
compared to the prior year.
Tax preparation and related fees increased $24.5 million, or 5.7%, primarily due to an
increase in the average fee per U.S. client served, partially offset by a decrease in U.S. clients
served in company-owned offices during the first month of the tax season. Improved performance
during the Australian and Canadian tax seasons also contributed $3.0 million and $2.6 million,
respectively, of additional tax preparation revenues in the current year.
Online tax service revenue declined $3.7 million, or 31.0%, primarily due to planned
reductions in unit prices.
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Other service revenues increased $8.8 million primarily as a result of additional revenues
associated with POM guarantees and our small business initiatives.
Royalty revenue increased $4.0 million, or 7.1%, due to an increase in the average fee
slightly offset by a slight decline in clients served in franchise offices.
Total expenses increased $141.6 million, or 16.9%, primarily due to $71.7 million of legal
reserves and related litigation fees recorded in the current period. Cost of services for the nine
months ended January 31, 2006 increased $47.7 million, or 8.1%, from the prior year. Our real
estate expansion efforts have contributed to a total increase of $29.0 million across all cost of
services categories.
Compensation and benefits increased $25.4 million primarily due to an increase in the staff
needed for our new offices, payroll taxes and the addition of costs related to our small business
initiatives. Occupancy expenses increased $23.0 million, or 12.9%, primarily as a result of higher
rent expenses, due to an 8.9% increase in company-owned offices under lease and an 8.5% increase in
the average rent. Utilities and real estate taxes also contributed to the increase.
Selling, general and administrative expenses increased $25.0 million, or 11.1%, over the prior
year primarily due to $13.1 million in additional costs from corporate shared services, $7.6
million of which was related to our marketing efforts. We also incurred $4.1 million in additional
legal expenses and $6.0 million in additional corporate wages.
The pretax loss was $293.7 million for the nine months ended January 31, 2006 compared to a
prior year loss of $182.9 million.
Fiscal 2006 outlook
Our fiscal year 2006 outlook for the Tax Services segment has not changed materially from the
discussion in our April 30, 2005 Form 10-K/A. As part of our real estate expansion, we opened 550
new company-owned offices and 184 new franchise offices in the current tax season, exceeding our
goal to open between 500 and 700 company-owned and franchise offices this year.
RAL Litigation
On December 21, 2005, we entered into a settlement agreement regarding litigation pertaining to our
RAL programs entitled Deadra D. Cummins, et al. v. H&R Block, Inc. et al.; Mitchell v. H&R Block,
Inc. et al.; Green v. H&R Block, Inc. et al.; and Becker v. H&R Block, Inc. (the “Settlement
Agreement”). The Settlement Agreement is subject to final court approval. Pursuant to the
Settlement Agreement’s terms, we will contribute a total of up to $62.5 million in cash for
purposes of making payments to the settlement class, paying all attorneys’ fees and costs to class
counsel, and covering service awards to the representative plaintiffs. In addition, we will pay
costs for providing notice of the settlement to settlement class members. We recorded a reserve of
$52.2 million related to this settlement in our third quarter.
We are named as a defendant in two other class-action lawsuits and one state attorney general
lawsuit alleging that we engaged in wrongdoing with respect to the RAL program. In March 2006, we
engaged in settlement negotiations with the plaintiffs in one of these RAL cases and accordingly
increased our reserves as of January 31, 2006 by $19.5 million. We believe we have strong defenses
to the other lawsuits and will vigorously defend our position. Nevertheless, the amounts claimed in
these lawsuits are, in some instances, very substantial, and there can be no assurances as to their
ultimate outcome, or as to their impact on our financial statements. See additional discussion of
RAL Litigation in note 12 to the condensed consolidated financial statements and in Part II, Item
1, “Legal Proceedings.”
MORTGAGE SERVICES
This segment is primarily engaged in the origination of non-prime mortgage loans through an
independent broker network, the origination of prime and non-prime mortgage loans through a retail
office network, the sale and securitization of mortgage loans and residual interests, and the
servicing of non-prime loans.
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Mortgage Services — Operating Statistics
| (dollars in 000s) | ||||||||||||
| Restated | ||||||||||||
| Three months ended | January 31, 2006 | January 31, 2005 | October 31, 2005 | |||||||||
Volume of loans originated: |
||||||||||||
Wholesale (non-prime) |
$ | 7,941,048 | $ | 7,378,071 | $ | 11,078,960 | ||||||
Retail: Non-prime |
667,542 | 776,797 | 1,111,924 | |||||||||
Prime |
343,897 | 238,867 | 429,924 | |||||||||
| $ | 8,952,487 | $ | 8,393,735 | $ | 12,620,808 | |||||||
Loan characteristics: |
||||||||||||
Weighted average FICO score (1) |
621 | 615 | 629 | |||||||||
Weighted average interest rate for borrowers (1) |
8.27 | % | 7.30 | % | 7.48 | % | ||||||
Weighted average loan-to-value (1) |
80.0 | % | 79.3 | % | 80.6 | % | ||||||
Origination margin (% of origination volume): (2) |
||||||||||||
Loan sale premium |
1.43 | % | 2.42 | % | 0.55 | % | ||||||
Residual cash flows from beneficial
interest in Trusts |
0.81 | % | 0.57 | % | 0.41 | % | ||||||
Gain on derivative instruments |
0.06 | % | 0.37 | % | 0.48 | % | ||||||
Loan sale repurchase reserves |
(0.15 | %) | (0.14 | %) | (0.16 | %) | ||||||
Retained mortgage servicing rights |
0.67 | % | 0.43 | % | 0.69 | % | ||||||
| 2.82 | % | 3.65 | % | 1.97 | % | |||||||
Cost of acquisition |
(0.27 | %) | (0.60 | %) | (0.40 | %) | ||||||
Direct origination expenses |
(0.69 | %) | (0.63 | %) | (0.56 | %) | ||||||
Net gain on sale — gross margin (3) |
1.86 | % | 2.42 | % | 1.01 | % | ||||||
Other revenues |
(0.04 | %) | 0.03 | % | 0.02 | % | ||||||
Other cost of origination |
(1.43 | %) | (1.47 | %) | (1.23 | %) | ||||||
Net margin |
0.39 | % | 0.98 | % | (0.20 | %) | ||||||
Total cost of origination |
2.12 | % | 2.10 | % | 1.79 | % | ||||||
Total cost of origination and acquisition |
2.39 | % | 2.70 | % | 2.19 | % | ||||||
Loan delivery: |
||||||||||||
Loan sales |
$ | 8,924,788 | $ | 8,348,537 | $ | 12,497,526 | ||||||
Execution price (4) |
0.51 | % | 2.82 | % | 1.63 | % | ||||||
| (1) | Represents non-prime production. |
|
| (2) | See “Reconciliation of Non-GAAP Financial Information” on page 44. | |
| (3) | Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume. | |
| (4) | Defined as total premium received divided by total balance of loans delivered to third-party investors or securitization vehicles (excluding mortgage servicing rights and the effect of loan origination expenses). |
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Mortgage Services — Operating Results
| (in 000s) | ||||||||||||
| Restated | ||||||||||||
| Three months ended | January 31, 2006 | January 31, 2005 | October 31, 2005 | |||||||||
Components of gains on sales: |
||||||||||||
Gain on mortgage loans |
$ | 161,399 | $ | 172,381 | $ | 66,580 | ||||||
Gain (loss) on derivatives |
5,060 | 30,756 | 60,750 | |||||||||
Gain on sales of residual interests |
— | — | 28,675 | |||||||||
Impairment of residual interests |
(8,562 | ) | (4,553 | ) | (8,738 | ) | ||||||
| 157,897 | 198,584 | 147,267 | ||||||||||
Interest income: |
||||||||||||
Accretion — residual interests |
28,849 | 32,728 | 33,564 | |||||||||
Other interest income |
3,464 | 4,064 | 4,605 | |||||||||
| 32,313 | 36,792 | 38,169 | ||||||||||
Loan servicing revenue |
106,065 | 72,928 | 100,386 | |||||||||
Other |
218 | 568 | 329 | |||||||||
Total revenues |
296,493 | 308,872 | 286,151 | |||||||||
Cost of services |
83,076 | 56,766 | 67,811 | |||||||||
Cost of other revenues: |
||||||||||||
Compensation and benefits |
70,647 | 64,100 | 84,151 | |||||||||
Occupancy |
9,169 | 9,546 | 10,531 | |||||||||
Other |
24,682 | 18,698 | 28,737 | |||||||||
| 104,498 | 92,344 | 123,419 | ||||||||||
Selling, general and administrative |
41,466 | 44,279 | 48,682 | |||||||||
Total expenses |
229,040 | 193,389 | 239,912 | |||||||||
Pretax income |
$ | 67,453 | $ | 115,483 | $ | 46,239 | ||||||
Three months ended January 31, 2006 compared to January 31, 2005
Mortgage Services’ revenues decreased $12.4 million, or 4.0%, for the three months ended January
31, 2006 compared to the prior year. Revenues decreased as a result of lower margins on mortgage
loans sold and a decline in gains on derivatives, partially offset by higher loan servicing
revenue.
The following table summarizes the key drivers of gains on sales of mortgage loans:
| (dollars in 000s) | ||||||||
| Three months ended January 31, | 2006 | 2005 | ||||||
Application process: |
||||||||
Total number of applications |
75,103 | 84,810 | ||||||
Number of sales associates (1) |
3,486 | 3,523 | ||||||
Closing ratio (2) |
61.4 | % | 60.4 | % | ||||
Originations: |
||||||||
Total number of originations |
46,134 | 51,267 | ||||||
Weighted average interest rate for borrowers (WAC) |
8.27 | % | 7.30 | % | ||||
Average loan size |
$ | 194 | $ | 164 | ||||
Total originations |
$ | 8,952,487 | $ | 8,393,735 | ||||
Direct origination and acquisition expenses, net |
$ | 85,974 | $ | 102,878 | ||||
Revenue (loan value): |
||||||||
Net gain on sale — gross margin (3) |
1.86 | % | 2.42 | % | ||||
| (1) | Includes all direct sales and back office sales support associates. |
|
| (2) | Percentage of loans funded divided by total applications in the period. | |
| (3) | Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume. |
Despite a 6.7% increase in loan origination volume, gains on sales of mortgage loans
decreased $11.0 million, primarily as a result of moderating demand by loan buyers and rapidly
rising two-year swap rates. Market interest rates, based on the two-year swap, increased from an
average of 3.39% last year to 4.83% in the current quarter. However, our WAC increased only 97
basis points, up to 8.27% from 7.30% in the prior year. Because of poor alignment of our WAC with
market rates and increases in our funding costs, our gross margin declined 56 basis points, to
1.86% from 2.42% last year.
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The value of MSRs we recorded in the third quarter increased to 67 basis points from 43 basis
points in the prior year, which coupled with an increase in origination volume, resulted in an
increase of $24.3 million in gains on sales of mortgage loans. In the second quarter of fiscal year
2006, we completed an evaluation of the assumptions used to value our MSRs. Based on the changes in
our assumptions as a result of this evaluation, the gain on sale for our retained MSRs increased by
approximately 14 basis points, primarily as a result of lower servicing costs, in particular
interest paid to bondholders on monthly loan prepayments. In addition, the increase in average loan
size to $194,000 from $164,000 in the current quarter resulted in an approximate 8 basis point
increase in the value of retained MSRs.
To mitigate the risk of short-term changes in market interest rates related to our loan
originations, we use interest rate swaps and forward loan sale commitments. We generally enter into
interest rate swap arrangements related to existing loan applications with rate-lock commitments
and for rate-lock commitments we expect to make in the next two to three weeks. During the current
quarter, we recorded a net $5.1 million in gains, compared to $30.8 million in the prior year,
related to our various derivative instruments. See note 8 to the condensed consolidated financial
statements.
During the current quarter, our available-for-sale residual interests performed better than
expected in our internal valuation models, with lower credit losses than originally modeled,
partially offset by higher interest rates. We recorded favorable pretax mark-to-market adjustments,
which increased the fair value of our residual interests $16.8 million during the quarter. These
adjustments were recorded, net of write-downs of $3.7 million and deferred taxes of $5.0 million,
in other comprehensive income and will be accreted into income throughout the remaining life of
those residual interests. Offsetting this increase were impairments of $8.6 million, which were
recorded in gains on sales of mortgage assets. Future changes in interest rates or other
assumptions, based on market conditions or actual loan pool performance, could cause additional
adjustments to the fair value of the residual interests and could cause changes to the accretion of
these residual interests in future periods.
The following table summarizes the key drivers of loan servicing revenues:
| (dollars in 000s) | ||||||||
| Three months ended January 31, | 2006 | 2005 | ||||||
Average servicing portfolio: |
||||||||
With related MSRs |
$ | 59,344,676 | $ | 41,753,865 | ||||
Without related MSRs |
21,046,638 | 15,584,677 | ||||||
| $ | 80,391,314 | $ | 57,338,542 | |||||
Ending servicing portfolio: |
||||||||
With related MSRs |
$ | 60,787,507 | $ | 43,642,212 | ||||
Without related MSRs |
15,994,170 | 15,342,627 | ||||||
| $ | 76,781,677 | $ | 58,984,839 | |||||
Number of loans serviced |
466,026 | 387,619 | ||||||
Average delinquency rate |
5.58 | % | 5.02 | % | ||||
Weighted average FICO score |
621 | 621 | ||||||
Weighted average interest rate (WAC) of portfolio |
7.63 | % | 7.38 | % | ||||
Value of MSRs |
$ | 262,369 | $ | 147,511 | ||||
Loan servicing revenues increased $33.1 million, or 45.4%, compared to the prior
year. The increase reflects a higher loan servicing portfolio resulting from our continued
origination growth. The average servicing portfolio for the three months ended January 31, 2006
increased $23.1 billion, or 40.2%, to $80.4 billion. The annualized rate earned on our entire
servicing portfolio was 34 basis points for the current quarter, compared to 37 basis points in the
prior year.
Total expenses for the three months ended January 31, 2006, increased $35.7 million, or 18.4%,
over the prior year. Cost of services increased $26.3 million as a result of a higher average
servicing portfolio during the current quarter and increased amortization of MSRs.
Cost of other revenues increased $12.2 million, primarily due to $6.5 million in increased
compensation and benefits as a result of an increase in the average number of sales associates
during the period and origination-based incentives. Other expenses increased $6.0 million primarily
as a
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result of $6.1 million in additional interest expense related to mortgage loans held on our
balance sheet.
Selling, general and administrative expenses decreased $2.8 million due to a reduction in
corporate staffing levels.
Pretax income decreased $48.0 million to $67.5 million for the three months ended January 31,
2006.
Three months ended January 31, 2006 compared to October 31, 2005
Mortgage Services’ revenues increased $10.3 million, or 3.6%, for the three months ended January
31, 2006, compared to the second quarter. Revenues increased primarily due to improving margins and
higher loan servicing revenue, partially offset by lower gains on derivatives and a gain on sale of
residual interests recorded in the second quarter.
The following table summarizes the key drivers of gains on sales of mortgage loans:
| (dollars in 000s) | ||||||||
| Three months ended | January 31, 2006 | October 31, 2005 | ||||||
Application process: |
||||||||
Total number of applications |
75,103 | 105,444 | ||||||
Number of sales associates (1) |
3,486 | 3,910 | ||||||
Closing ratio (2) |
61.4 | % | 63.8 | % | ||||
Originations: |
||||||||
Total number of originations |
46,134 | 67,264 | ||||||
Weighted average interest rate for borrowers (WAC) |
8.27 | % | 7.48 | % | ||||
Average loan size |
$ | 194 | $ | 188 | ||||
Total originations |
$ | 8,952,487 | $ | 12,620,808 | ||||
Direct origination and acquisition expenses, net |
$ | 85,974 | $ | 120,981 | ||||
Revenue (loan value): |
||||||||
Net gain on sale — gross margin (3) |
1.86 | % | 1.01 | % | ||||
| (1) | Includes all direct sales and back office sales support associates. |
|
| (2) | Percentage of loans funded divided by total applications in the period. | |
| (3) | Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume. |
Gains on sales of mortgage loans increased $94.8 million primarily as a result of
better pricing in the market coupled with increases in our coupon rates and lower origination
expenses. We implemented a series of increases in our coupon rate beginning in September 2005 and
continuing into our third quarter, and as a result, our WAC increased 79 basis points, from 7.48%
to 8.27%. These rate changes, which were partially offset by lower gains on derivatives, caused our
net gain on sale — gross margin to increase 85 basis points. Our loan origination volumes
decreased 29.1% from the second quarter.
To mitigate the risk of short-term changes in market interest rates, we use interest rate
swaps and forward loan sale commitments. We recorded $5.1 million in net gains during the third
quarter, compared to $60.8 million in the second quarter, related to our various derivative
instruments. See note 8 to the condensed consolidated financial statements.
During the preceding quarter, we recorded a $28.7 million gain on the sale of
available-for-sale residual interests. This gain accelerated cash flows from residual interests,
and resulted in realization of previously recorded unrealized gains included in other comprehensive
income. We had no similar transaction in the current quarter.
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The following table summarizes the key drivers of loan servicing revenues:
| (dollars in 000s) | ||||||||
| Three months ended | January 31, 2006 | October 31, 2005 | ||||||
Average servicing portfolio: |
||||||||
With related MSRs |
$ | 59,344,676 | $ | 55,150,897 | ||||
Without related MSRs |
21,046,638 | 22,065,265 | ||||||
| $ | 80,391,314 | $ | 77,216,162 | |||||
Ending servicing portfolio: |
||||||||
With related MSRs |
$ | 60,787,507 | $ | 57,760,816 | ||||
Without related MSRs |
15,994,170 | 24,614,920 | ||||||
| $ | 76,781,677 | $ | 82,375,736 | |||||
Number of loans serviced |
466,026 | 500,935 | ||||||
Average delinquency rate |
5.58 | % | 4.37 | % | ||||
Weighted average FICO score |
621 | 622 | ||||||
Weighted average interest rate (WAC) of portfolio |
7.63 | % | 7.47 | % | ||||
Value of MSRs |
$ | 262,369 | $ | 245,928 | ||||
Loan servicing revenues increased $5.7 million, or 5.7%, compared to the second
quarter. The increase reflects a higher average loan servicing portfolio, which increased $3.2
billion, or 4.1%. The annualized rate earned on our entire servicing portfolio was 34 basis points
for the current quarter, which was flat compared to the second quarter rate.
Total expenses decreased $10.9 million compared to the second quarter. Cost of services
increased $15.3 million as a result of a higher average servicing portfolio during the current
quarter. Cost of other revenues decreased $18.9 million, primarily due to a $13.5 million decrease
in compensation and benefits as a result of 10.8% decrease in sales associates and lower
origination-based incentives. Other expenses decreased $4.1 million for the current quarter,
primarily due to cost savings initiatives, partially offset by $2.2 million in additional interest
expense.
Selling, general and administrative expenses declined $7.2 million, or 14.8%, due to cost
savings initiatives and lower marketing expenses.
Pretax income increased $21.2 million, or 45.9%, for the three months ended January 31, 2006
compared to the preceding quarter.
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Mortgage Services — Operating Statistics
| (dollars in 000s) | ||||||||
| Restated | ||||||||
| Nine months ended | January 31, 2006 | January 31, 2005 | ||||||
Volume of loans originated: |
||||||||
Wholesale (non-prime) |
$ | 28,557,235 | $ | 18,887,536 | ||||
Retail:Non-prime |
2,730,272 | 2,197,898 | ||||||
Prime |
1,173,417 | 637,801 | ||||||
| $ | 32,460,924 | $ | 21,723,235 | |||||
Loan characteristics: |
||||||||
Weighted average FICO score (1) |
625 | 611 | ||||||
Weighted average interest rate for borrowers (1) |
7.71 | % | 7.32 | % | ||||
Weighted average loan-to-value (1) |
80.6 | % | 78.6 | % | ||||
Origination margin (% of origination volume): (2) |
||||||||
Loan sale premium |
1.39 | % | 2.83 | % | ||||
Residual cash flows from beneficial
interest in Trusts |
0.54 | % | 0.66 | % | ||||
Gain (loss) on derivative instruments |
0.28 | % | 0.13 | % | ||||
Loan sale repurchase reserves |
(0.15 | %) | (0.15 | %) | ||||
Retained mortgage servicing rights |
0.60 | % | 0.44 | % | ||||
| 2.66 | % | 3.91 | % | |||||
Cost of acquisition |
(0.39 | %) | (0.56 | %) | ||||
Direct origination expenses |
(0.60 | %) | (0.71 | %) | ||||
Net gain on sale — gross margin (3) |
1.67 | % | 2.64 | % | ||||
Other revenues |
(0.01 | %) | 0.04 | % | ||||
Other cost of origination |
(1.32 | %) | (1.57 | %) | ||||
Net margin |
0.34 | % | 1.11 | % | ||||
Total cost of origination |
1.92 | % | 2.28 | % | ||||
Total cost of origination and acquisition |
2.31 | % | 2.84 | % | ||||
Loan delivery: |
||||||||
Loan sales |
$ | 32,265,319 | $ | 21,653,373 | ||||
Execution price (4) |
1.68 | % | 3.21 | % | ||||
| (1) | Represents non-prime production. |
|
| (2) | See “Reconciliation of Non-GAAP Financial Information” on page 44. | |
| (3) | Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume. | |
| (4) | Defined as total premium received divided by total balance of loans delivered to third-party investors or securitization vehicles (excluding mortgage servicing rights and the effect of loan origination expenses). |
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Mortgage Services — Operating Results
| (in 000s) | ||||||||
| Restated | ||||||||
| Nine months ended | January 31, 2006 | January 31, 2005 | ||||||
Components of gains on sales: |
||||||||
Gain on mortgage loans |
$ | 450,199 | $ | 544,428 | ||||
Gain (loss) on derivatives |
91,896 | 28,826 | ||||||
Gain on sales of residual interests |
28,675 | — | ||||||
Impairment of residual interests |
(29,175 | ) | (7,162 | ) | ||||
| 541,595 | 566,092 | |||||||
Interest income: |
||||||||
Accretion — residual interests |
93,190 | 96,242 | ||||||
Other interest income |
10,837 | 7,948 | ||||||
| 104,027 | 104,190 | |||||||
Loan servicing revenue |
296,720 | 193,690 | ||||||
Other |
740 | 1,205 | ||||||
Total revenues |
943,082 | 865,177 | ||||||
Cost of services |
215,279 | 159,558 | ||||||
Cost of other revenues: |
||||||||
Compensation and benefits |
235,081 | 165,220 | ||||||
Occupancy |
32,329 | 26,468 | ||||||
Other |
76,297 | 58,040 | ||||||
| 343,707 | 249,728 | |||||||
Selling, general and administrative |
135,936 | 122,911 | ||||||
Total expenses |
694,922 | 532,197 | ||||||
Pretax income |
$ | 248,160 | $ | 332,980 | ||||
Nine months ended January 31, 2006 compared to January 31, 2005
Mortgage Services’ revenues increased $77.9 million, or 9.0%, for the nine months ended January 31,
2006 compared to the prior year. Revenues increased as a result of higher loan servicing revenues,
increased gains on derivatives and a gain on sale of residual interests, partially offset by lower
margins on mortgage loans sold and impairments of residual interests.
The following table summarizes the key drivers of gains on sales of mortgage loans:
| (dollars in 000s) | ||||||||
| Nine months ended January 31, | 2006 | 2005 | ||||||
Application process: |
||||||||
Total number of applications |
290,476 | 232,001 | ||||||
Number of sales associates (1) |
3,486 | 3,523 | ||||||
Closing ratio (2) |
61.8 | % | 58.9 | % | ||||
Originations: |
||||||||
Total number of originations |
179,439 | 136,615 | ||||||
Weighted average interest rate for borrowers (WAC) |
7.71 | % | 7.32 | % | ||||
Average loan size |
$ | 181 | $ | 159 | ||||
Total originations |
$ | 32,460,924 | $ | 21,723,235 | ||||
Direct origination and acquisition expenses, net |
$ | 321,177 | $ | 275,217 | ||||
Revenue (loan value): |
||||||||
Net gain on sale — gross margin (3) |
1.67 | % | 2.64 | % | ||||
| (1) | Includes all direct sales and back office sales support associates. |
|
| (2) | Percentage of loans funded divided by total applications in the period. | |
| (3) | Defined as gain on sale of mortgage loans (including gain or loss on derivatives, mortgage servicing rights and net of direct origination and acquisition expenses) divided by origination volume. |
Gains on sales of mortgage loans decreased $94.2 million, primarily as a result of
rapidly rising two-year swap rates and moderating demand by loan buyers, partially offset by
increased origination volume. Market interest rates, based on the two-year swap, increased from an
average of 3.10% last year to 4.45% in the current year. However, our WAC increased only 39 basis
points, up to 7.71% from 7.32% in the prior year. Because our WAC was not more aligned with market rates,
increased
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funding costs and poor pricing in the market, offset by derivative gains, our gross
margin declined 97 basis points, to 1.67% from 2.64% last year. Origination volumes increased 49.4%
over the prior year, due to increased productivity of our account executives and support staff, new
product introductions, increased applications and a higher closing ratio.
Changes in our MSR assumptions, an increase in the average loan size and an increase in
origination volume resulted in an increase of $101.7 million
related to the retained MSR component of gains on sales of mortgage loans.
As a result of rising interest rates and an increase in the notional amounts of interest rate
swaps in place as a result of increased origination volumes during the current year, we recorded a
net $91.9 million in gains, compared to $28.8 million in the prior year, related to our various
derivative instruments. See note 8 to the condensed consolidated financial statements.
We recorded a $0.6 million net favorable mark-to-market adjustment for our trading residuals
during the current period, and a gain of $28.7 million on the sale of residual interests. During
the prior year, we recorded $5.4 million in net favorable mark-to-market adjustments for our
trading residuals.
During the nine months ended January 31, 2006, our available-for-sale residual interests
performed better than expected in our internal valuation models, with lower credit losses than
originally modeled, partially offset by higher interest rates. We recorded favorable pretax
mark-to-market adjustments, which increased the fair value of our residual interests $47.8 million
during the period. These adjustments were recorded, net of write-downs of $8.9 million and deferred
taxes of $14.9 million, in other comprehensive income and will be accreted into income throughout
the remaining life of those residual interests. Offsetting this increase were impairments of
available-for-sale residual interests totaling $29.2 million, which were recorded in gains on sales
of mortgage assets. Impairments increased $22.0 million over the prior year due to interest rates
increasing greater than originally modeled and a decline in the value of older residuals based on
loan performance.
During the current year, Gulf Coast hurricanes caused severe damage to property, including
property securing mortgage loans underlying our beneficial and residual interests. As of January
31, 2006, we have exposure to losses related to approximately $359 million of loans in the affected
areas, including $338 million related to loans underlying securitizations in which we hold a
residual interest and $21 million related to loans that are in the Trusts or have been repurchased
from the Trusts. At January 31, 2006, total 31+ days delinquencies in the affected areas were
approximately $106 million, compared to approximately $50 million that were 31+ days delinquent
prior to the hurricanes. We recorded a specific provision for estimated losses arising from
hurricane damage totaling $6.0 million during our second quarter, based on an analysis of
delinquent loans within the federally declared disaster areas. Of the total provision, $3.1 million
was recorded as a reserve for losses on loans that we have or may be required to repurchase
pursuant to existing standard representations and warranties, and $2.9 million was recorded as an
impairment of our residual interests. There were no significant
changes to the reserves during the third quarter. In addition to the residual impairments recorded this
quarter, future write-downs of residual interests may be incurred and recorded in other
comprehensive income. We are continuing to analyze our exposure to potential losses and the amount
of losses ultimately realized may differ from amounts previously recorded.
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The following table summarizes the key drivers of loan servicing revenues:
| (dollars in 000s) | ||||||||
| Nine months ended January 31, | 2006 | 2005 | ||||||
Average servicing portfolio: |
||||||||
With related MSRs |
$ | 54,784,155 | $ | 39,593,946 | ||||
Without related MSRs |
21,210,097 | 12,586,192 | ||||||
| $ | 75,994,252 | $ | 52,180,138 | |||||
Ending servicing portfolio: |
||||||||
With related MSRs |
$ | 60,787,507 | $ | 43,642,212 | ||||
Without related MSRs |
15,994,170 | 15,342,627 | ||||||
| $ | 76,781,677 | $ | 58,984,839 | |||||
Number of loans serviced |
466,026 | 387,619 | ||||||
Average delinquency rate |
4.76 | % | 5.03 | % | ||||
Weighted average FICO score |
621 | 616 | ||||||
Weighted average interest rate (WAC) of portfolio |
7.51 | % | 7.50 | % | ||||
Value of MSRs |
$ | 262,369 | $ | 147,511 | ||||
Loan servicing revenues increased $103.0 million, or 53.2%, compared to the prior
year. The increase reflects a higher loan servicing portfolio. The average servicing portfolio for
the nine months ended January 31, 2006 increased $23.8 billion, or 45.6%, to $76.0 billion. The
annualized rate earned on our entire servicing portfolio was 34 basis points for the current
period, compared to 36 basis points in the prior year.
Total expenses for the nine months ended January 31, 2006, increased $162.7 million, or 30.6%,
over the prior year. Cost of services increased $55.7 million as a result of a higher average
servicing portfolio during the current period and increased amortization of MSRs. Cost of other
revenues increased $94.0 million, primarily due to $69.9 million in increased compensation and
benefits as a result of an increase in the average number of sales associates during the period and
origination-based incentives. Occupancy expenses increased $5.9 million, or 22.1%, primarily as a
result of an increase in branch offices and related equipment and utilities costs. Other expenses
increased $18.3 million primarily as a result of $13.3 million in additional interest expense
related to loans held on our balance sheet, coupled with increases in depreciation and supplies.
Selling, general and administrative expenses increased $13.0 million primarily due to $16.0
million in additional retail marketing costs.
Pretax income decreased $84.8 million to $248.2 million for the nine months ended January 31,
2006.
Fiscal 2006 outlook
For the fourth quarter of fiscal year 2006, we believe we can achieve funding volumes of
approximately $8 billion to $9 billion resulting in full year origination growth of approximately
30%. As a result of higher WACs on funded mortgage loans, a stabilizing external rate environment
and further cost-saving measures, we believe we will see origination margins of 90 to 100 basis
points in the fourth quarter, resulting in an origination margin of 45 to 55 basis points for the
full fiscal year. During the fourth quarter, we expect to take actions to reduce staffing levels
and close a number of branches, which is estimated to result in a pretax charge of $10 million to
$12 million. Excluding the charge associated with these actions, we believe that our fourth quarter
cost of origination will approximate 175 basis points.
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BUSINESS SERVICES
This segment offers middle-market companies accounting, tax and consulting services, wealth
management, retirement resources, payroll and benefits services, corporate finance and financial
process outsourcing.
Business Services — Operating Statistics
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Accounting, tax and consulting: |
||||||||||||||||
Chargeable hours |
1,107,398 | 641,009 | 2,467,355 | 1,852,346 | ||||||||||||
Chargeable hours per person |
314 | 332 | 895 | 935 | ||||||||||||
Net billed rate per hour |
$ | 145 | $ | 134 | $ | 141 | $ | 129 | ||||||||
Average margin per person |
$ | 25,154 | $ | 25,194 | $ | 65,567 | $ | 64,621 | ||||||||
Business Services — Operating Results
| (in 000s) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Service revenues: |
||||||||||||||||
Accounting, tax and consulting |
$ | 187,154 | $ | 91,588 | $ | 392,772 | $ | 259,519 | ||||||||
Capital markets |
13,567 | 17,631 | 44,394 | 48,309 | ||||||||||||
Payroll, benefits and retirement services |
8,796 | 5,885 | 25,690 | 14,384 | ||||||||||||
Other services |
16,898 | 8,805 | 37,893 | 22,911 | ||||||||||||
| 226,415 | 123,909 | 500,749 | 345,123 | |||||||||||||
Other |
9,425 | 8,963 | 28,742 | 25,898 | ||||||||||||
Total revenues |
235,840 | 132,872 | 529,491 | 371,021 | ||||||||||||
Cost of services: |
||||||||||||||||
Compensation and benefits |
130,490 | 68,695 | 297,031 | 206,684 | ||||||||||||
Occupancy |
18,339 | 6,627 | 37,514 | 17,031 | ||||||||||||
Other |
20,124 | 8,129 | 43,421 | 31,151 | ||||||||||||
| 168,953 | 83,451 | 377,966 | 254,866 | |||||||||||||
Selling, general and administrative |
67,922 | 43,505 | 161,468 | 125,176 | ||||||||||||
Total expenses |
236,875 | 126,956 | 539,434 | 380,042 | ||||||||||||
Pretax income (loss) |
$ | (1,035 | ) | $ | 5,916 | $ | (9,943 | ) | $ | (9,021 | ) | |||||
Three months ended January 31, 2006 compared to January 31, 2005
Business Services’ revenues for the three months ended January 31, 2006 increased $103.0 million,
or 77.5%, from the prior year. This increase was primarily due to the acquisition of American
Express Tax and Business Services, Inc., which increased accounting, tax and consulting revenues
$95.4 million.
Capital markets revenues declined $4.1 million due to a 34.2% decline in the number of
business valuation projects. Payroll, benefits and retirement services revenues increased $2.9
million primarily due to acquisitions completed during the third and fourth quarters of fiscal year
2005. Other service revenues increased $8.1 million as a result of acquisitions completed in the
fourth quarter of fiscal year 2005 in our financial process outsourcing business and growth in
wealth management services.
Total expenses increased $109.9 million, or 86.6%, for the three months ended January 31, 2006
compared to the prior year. Cost of services increased $85.5 million, primarily due to a $61.8
million increase in compensation and benefits. Compensation and benefits increased $57.9 million
due to the American Express Tax and Business Services, Inc. acquisition. Baseline increases in the
number of personnel and the average wage per employee, driven by marketplace competition for
professional staff, also contributed to the increase. Occupancy expenses increased $11.7 million
due primarily to acquisitions. Other cost of services increased $12.0 million primarily due to the
American Express Tax and Business Services, Inc. acquisition.
Selling, general and administrative expenses increased $24.4 million primarily due to
acquisitions and additional costs associated with our business development initiatives.
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The pretax loss for the three months ended January 31, 2006 of $1.0 million, which includes
losses of $6.0 million from American Express Tax and Business Services, Inc., compared to pretax
income of $5.9 million in the prior year.
Due to the seasonal nature of this segment’s business, operating results for the three months
ended January 31, 2006 are not comparable to the three months ended October 31, 2005 and are not
indicative of the expected results for the entire fiscal year.
Nine months ended January 31, 2006 compared to January 31, 2005
Business Services’ revenues for the nine months ended January 31, 2006 increased $158.5 million, or
42.7%, from the prior year. This increase was primarily due to a $133.3 million increase in
accounting, tax and consulting revenues resulting primarily from the acquisition of American
Express Tax and Business Services, Inc., which increased revenues $115.9 million. We also benefited
from a 6.9% increase in the net billed rate per hour, excluding the impact of the acquisition.
Capital markets revenues declined $3.9 million due to a 19.6% decline in the number of
business valuation projects. Payroll, benefits and retirement services revenues increased $11.3
million, or 78.6%, primarily due to acquisitions completed during the third and fourth quarters of
fiscal year 2005. Other service revenues increased $15.0 million as a result of acquisitions
completed in the fourth quarter of fiscal year 2005 in our financial process outsourcing business
and growth in wealth management services.
Total expenses increased $159.4 million, or 41.9%, for the nine months ended January 31, 2006
compared to the prior year. Cost of services increased $123.1 million, primarily due to a $90.3
million increase in compensation and benefits. Compensation and benefits increased $72.0 million
due to the American Express Tax and Business Services, Inc. acquisition. Baseline increases in the
number of personnel and the average wage per employee, driven by marketplace competition for
professional staff and other acquisitions completed in the third and fourth quarters of fiscal year
2005, also contributed to this increase. Occupancy expenses increased $20.5 million due primarily
to acquisitions. Other cost of services increased $12.3 million primarily due to the American
Express Tax and Business Services, Inc. acquisition.
Selling, general and administrative expenses increased $36.3 million primarily due to
acquisitions and additional costs associated with our business development initiatives.
The pretax loss for the nine months ended January 31, 2006 was $9.9 million, which includes
losses of $9.3 million from American Express Tax and Business Services, Inc., compared to $9.0
million in the prior year.
Fiscal 2006 outlook
Our fiscal year 2006 outlook for our Business Services segment is consistent with the discussion in
our April 30, 2005 Form 10-K/A, except for the previously announced acquisition of American Express
Tax and Business Services, Inc. effective October 1, 2005. We expect organic growth for this
segment’s pretax income of approximately 30%, and expect the acquisition of American Express Tax
and Business Services, Inc. will be accretive by two cents per diluted share for fiscal year 2006,
after expected integration costs. We expect Business Services’ pretax income for fiscal year 2006
to increase nearly 75% over the prior year.
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INVESTMENT SERVICES
This segment is primarily engaged in offering advice-based brokerage services and investment
planning. Our integration of investment advice and new service offerings are allowing us to shift
our emphasis from a transaction-based client relationship to a more advice-based focus.
Investment Services — Operating Statistics
| Three months ended | January 31, 2006 | January 31, 2005 | October 31, 2005 | |||||||||
Customer trades (1) |
255,879 | 245,612 | 233,262 | |||||||||
Customer daily average trades |
4,127 | 3,899 | 3,589 | |||||||||
Average revenue per trade (2) |
$ | 113.83 | $ | 120.62 | $ | 123.16 | ||||||
Customer accounts: (3) |
||||||||||||
Traditional brokerage |
426,699 | 431,902 | 428,543 | |||||||||
Express IRAs |
381,859 | 295,676 | 378,200 | |||||||||
| 808,558 | 727,578 | 806,743 | ||||||||||
Ending balance of assets under
administration (billions) |
$ | 31.4 | $ | 28.4 | $ | 29.8 | ||||||
Average assets per traditional
brokerage account |
$ | 72,914 | $ | 65,339 | $ | 68,837 | ||||||
Average margin balances (millions) |
$ | 529 | $ | 596 | $ | 560 | ||||||
Average customer payable balances (millions) |
$ | 769 | $ | 989 | $ | 794 | ||||||
Number of advisors |
956 | 1,013 | 995 | |||||||||
| Included in the numbers above are the following relating to fee-based accounts: | ||||||||||||
Customer household accounts |
8,806 | 7,263 | 8,547 | |||||||||
Average revenue per account |
$ | 2,551 | $ | 2,149 | $ | 2,164 | ||||||
Ending balance of assets under
administration (millions) |
$ | 2,420 | $ | 1,911 | $ | 2,217 | ||||||
Average assets per active account |
$ | 270,217 | $ | 248,400 | $ | 259,355 | ||||||
| (1) | Includes only trades on which revenues are earned (“revenue trades”). Revenues are earned on both transactional and annuitized trades. | |
| (2) | Calculated as total trade revenues divided by revenue trades. | |
| (3) | Includes only accounts with a positive balance. |
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Investment Services — Operating Results
| (in 000s) | ||||||||||||
| Restated | ||||||||||||
| Three months ended | January 31, 2006 | January 31, 2005 | October 31, 2005 | |||||||||
Service revenue: |
||||||||||||
Transactional revenue |
$ | 23,078 | $ | 24,654 | $ | 23,332 | ||||||
Annuitized revenue |
25,300 | 18,382 | 23,062 | |||||||||
Production revenue |
48,378 | 43,036 | 46,394 | |||||||||
Other service revenue |
8,169 | 7,000 | 8,064 | |||||||||
| 56,547 | 50,036 | 54,458 | ||||||||||
Margin interest revenue |
15,947 | 11,975 | 14,826 | |||||||||
Less: interest expense |
(1,789 | ) | (1,090 | ) | (1,363 | ) | ||||||
Net interest revenue |
14,158 | 10,885 | 13,463 | |||||||||
Other |
682 | 93 | 734 | |||||||||
Total revenues (1) |
71,387 | 61,014 | 68,655 | |||||||||
Cost of services: |
||||||||||||
Compensation and benefits |
35,901 | 28,986 | 32,676 | |||||||||
Occupancy |
5,283 | 5,948 | 5,187 | |||||||||
Other |
5,626 | 5,530 | 5,541 | |||||||||
| 46,810 | 40,464 | 43,404 | ||||||||||
Selling, general and administrative |
32,245 | 40,325 | 33,157 | |||||||||
Total expenses |
79,055 | 80,789 | 76,561 | |||||||||
Pretax loss |
$ | (7,668 | ) | $ | (19,775 | ) | $ | (7,906 | ) | |||
| (1) | Total revenues, less interest expense. |
Three months ended January 31, 2006 compared to January 31, 2005
Investment Services’ revenues, net of interest expense, for the three months ended January 31, 2006
increased $10.4 million, or 17.0%.
Production revenue increased $5.3 million, or 12.4%, over the prior year. Transactional
revenue, which is based on sales of individual securities, decreased $1.6 million, or 6.4%, from
the prior year due primarily to a 5.5% decrease in average revenue per transactional trade and a
0.4% decrease in transactional trading volume. Annuitized revenue, which is based on sales of
various fee-based products, increased $6.9 million, or 37.6%, due to increased sales of annuities
and insurance, wealth management accounts, mutual funds, and unit investment trusts (UITs). The
shift in revenues from transactional to annuitized demonstrates our continued move toward an
advice-based focus.
Annualized productivity averaged approximately $201,000 per advisor during the current quarter
compared to $172,000 in the prior year. Increased productivity was due to higher production levels
across all recruiting classes. Minimum production standards put into place during the fourth
quarter of fiscal year 2005 resulted in 122 advisors increasing their production to date. These
standards also resulted in 141 low-producing advisors leaving the company to date. We expect
average advisor productivity to continue increasing throughout the remainder of the fiscal year.
Margin interest revenue increased $4.0 million, or 33.2%, from the prior year, as a result of
higher interest rates earned, partially offset by a decline in average margin balances.
Total expenses decreased $1.7 million, or 2.1%. Cost of services increased $6.3 million, or
15.7%, primarily as a result of $6.9 million of additional compensation and benefits expenses
resulting from higher production revenues.
Selling, general and administrative expenses decreased $8.1 million, or 20.0%, primarily due
to a $3.9 million decline in legal expenses, due in part to a favorable arbitration outcome.
Current quarter results also improved due to reduced back-office headcount relating to cost
containment efforts and gains on the disposition of certain assets during the quarter. These
decreases were partially offset by increased bonus accruals associated with the segment’s improved
performance.
The pretax loss for Investment Services for the three months ended January 31, 2006 was $7.7
million compared to the prior year loss of $19.8 million.
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Three months ended January 31, 2006 compared to October 31, 2005
Investment Services’ revenues, net of interest expense, for the three months ended January 31, 2006
increased $2.7 million, or 4.0% compared to the preceding quarter.
Production revenue increased $2.0 million, or 4.3%, over the preceding quarter, primarily due
to increased sales of wealth management accounts, mutual funds, annuities and insurance.
Total expenses increased $2.5 million, or 3.3%. Compensation and benefits increased $3.2
million, primarily resulting from higher production revenues. This increase was partially offset by
a $2.5 million decrease in legal expenses, due in part to a favorable arbitration outcome.
The pretax loss for the Investment Services segment was $7.7 million, compared to a loss of
$7.9 million in the second quarter of fiscal year 2006.
Investment Services — Operating Statistics
| Nine months ended | January 31, 2006 | January 31, 2005 | ||||||
Customer trades (1) |
715,519 | 644,469 | ||||||
Customer daily average trades |
3,766 | 3,410 | ||||||
Average revenue per trade (2) |
$ | 120.94 | $ | 121.68 | ||||
Customer accounts: (3) |
||||||||
Traditional brokerage |
426,699 | 431,902 | ||||||
Express IRAs |
381,859 | 295,676 | ||||||
| 808,558 | 727,578 | |||||||
Ending balance of assets under
administration (billions) |
$ | 31.4 | $ | 28.4 | ||||
Average assets per traditional
brokerage account |
$ | 72,914 | $ | 65,339 | ||||
Average margin balances (millions) |
$ | 554 | $ | 595 | ||||
Average customer payable balances (millions) |
$ | 801 | $ | 988 | ||||
Number of advisors |
956 | 1,013 | ||||||
Included in the numbers above are the following relating to fee-based accounts: |
||||||||
Customer household accounts |
8,806 | 7,263 | ||||||
Average revenue per account |
$ | 2,319 | $ | 2,039 | ||||
Ending balance of assets under
administration (millions) |
$ | 2,420 | $ | 1,911 | ||||
Average assets per active account |
$ | 270,217 | $ | 248,400 | ||||
| (1) | Includes only trades on which revenues are earned (“revenue trades”). Revenues are earned on both transactional and annuitized trades. | |
| (2) | Calculated as total trade revenues divided by revenue trades. | |
| (3) | Includes only accounts with a positive balance. |
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Investment Services — Operating Results
| (in 000s) | ||||||||
| Restated | ||||||||
| Nine months ended | January 31, 2006 | January 31, 2005 | ||||||
Service revenue: |
||||||||
Transactional revenue |
$ | 69,245 | $ | 64,594 | ||||
Annuitized revenue |
70,633 | 54,114 | ||||||
Production revenue |
139,878 | 118,708 | ||||||
Other service revenue |
24,440 | 19,789 | ||||||
| 164,318 | 138,497 | |||||||
Margin interest revenue |
44,866 | 30,773 | ||||||
Less: interest expense |
(4,406 | ) | (1,930 | ) | ||||
Net interest revenue |
40,460 | 28,843 | ||||||
Other |
1,993 | 176 | ||||||
Total revenues (1) |
206,771 | 167,516 | ||||||
Cost of services: |
||||||||
Compensation and benefits |
99,112 | 84,908 | ||||||
Occupancy |
15,635 | 16,510 | ||||||
Other |
16,102 | 14,885 | ||||||
| 130,849 | 116,303 | |||||||
Selling, general and administrative |
99,048 | 112,095 | ||||||
Total expenses |
229,897 | 228,398 | ||||||
Pretax loss |
$ | (23,126 | ) | $ | (60,882 | ) | ||
| (1) | Total revenues, less interest expense. |
Nine months ended January 31, 2006 compared to January 31, 2005
Investment Services’ revenues, net of interest expense, for the nine months ended January 31, 2006
increased $39.3 million, or 23.4%, over the prior year.
Production revenue increased $21.2 million, or 17.8%, over the prior year. Transactional
revenue increased $4.7 million, or 7.2%, from the prior year due primarily to a 6.6% increase in
transactional trading volume and a 1.8% increase in average revenue per transactional trade.
Annuitized revenue increased $16.5 million, or 30.5%, due to increased sales of annuities,
insurance, mutual funds, wealth management accounts and UITs.
Annualized productivity averaged approximately $187,000 per advisor during the current year
compared to $158,000 in the prior year. Increased productivity was due to higher production levels
across all recruiting classes. Minimum production standards put into place during the fourth
quarter of fiscal year 2005 resulted in 122 advisors increasing their production to date. These
standards also resulted in 141 low-producing advisors leaving the company to date.
Other service revenue increased $4.7 million due to increased money market, account and
underwriting fees.
Margin interest revenue increased $14.1 million, or 45.8%, from the prior year, as a result of
higher interest rates earned, partially offset by lower average margin balances.
Total expenses increased $1.5 million, or 0.7%. Cost of services increased $14.5 million, or
12.5%, primarily as a result of $14.2 million of additional compensation and benefits. This
increase is primarily due to higher production revenues, partially offset by cost containment
measures implemented in the fourth quarter of fiscal year 2005.
Selling, general and administrative expenses decreased $13.0 million, or 11.6%, primarily due
to a $5.6 million decline in legal expenses, due in part to a favorable arbitration outcome. We
also experienced a $4.3 million decline in compensation and benefits from reduced back-office
headcount relating to cost containment efforts and $3.2 million in additional gains on the
disposition of certain assets during the year. These decreases were partially offset by increased
bonuses associated with the segment’s improved performance.
The pretax loss for Investment Services through January 31, 2006 was $23.1 million compared to
the prior year loss of $60.9 million.
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Fiscal 2006 outlook
Our fiscal year 2006 outlook for our Investment Services segment has improved slightly from the
discussion in our April 30, 2005 Form 10-K/A. We now anticipate the loss for Investment Services
for fiscal year 2006 will be approximately $30 million to $37 million less than the loss reported
in fiscal year 2005, instead of the $25 million to $35 million improvement we previously discussed.
CORPORATE
This segment consists primarily of corporate support departments, which provide services to our
operating segments. These support departments consist of marketing, information technology,
facilities, human resources, executive, legal, finance, government relations and corporate
communications. Support department costs are generally allocated to our operating segments. Our
captive insurance and franchise financing subsidiaries are also included within this segment,
as was our small business initiatives subsidiary in the first half of fiscal year 2005.
Corporate — Operating Results
| (in 000s) | ||||||||||||||||
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| Restated | Restated | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Operating revenues |
$ | 5,857 | $ | 3,425 | $ | 15,266 | $ | 10,290 | ||||||||
Eliminations |
(3,113 | ) | (2,123 | ) | (8,731 | ) | (6,833 | ) | ||||||||
Total revenues |
2,744 | 1,302 | 6,535 | 3,457 | ||||||||||||
Corporate expenses: |
||||||||||||||||
Interest expense |
20,334 | 20,937 | 49,566 | 55,673 | ||||||||||||
Other |
12,559 | 12,317 | 44,396 | 35,422 | ||||||||||||
| 32,893 | 33,254 | 93,962 | 91,095 | |||||||||||||
Shared services: |
||||||||||||||||
Information technology |
30,068 | 29,023 | 85,615 | 81,435 | ||||||||||||
Marketing |
52,574 | 46,030 | 63,655 | 57,292 | ||||||||||||
Finance |
11,072 | 9,107 | 36,138 | 26,620 | ||||||||||||
Other |
38,610 | 31,584 | 82,944 | 78,179 | ||||||||||||
| 132,324 | 115,744 | 268,352 | 243,526 | |||||||||||||
Allocation of shared services |
(131,952 | ) | (117,297 | ) | (268,370 | ) | (245,096 | ) | ||||||||
Other income, net |
3,511 | 18,398 | 12,430 | 20,574 | ||||||||||||
Pretax loss |
$ | (27,010 | ) | $ | (12,001 | ) | $ | (74,979 | ) | $ | (65,494 | ) | ||||
Three months ended January 31, 2006 compared to January 31, 2005
Marketing department expenses increased $6.5 million, or 14.2%, due primarily to an increase in
digital advertising efforts. Finance department expenses increased $2.0 million, primarily due to
additional consulting expenses and increases in compensation expenses. Other support department
expenses increased $7.0 million primarily due to increases in stock-based compensation expenses.
Other income declined $14.9 million primarily as a result of a $16.7 million legal recovery we
received during the prior year quarter.
The pretax loss was $27.0 million, compared with last year’s third quarter loss of $12.0
million.
Due to the nature of this segment, the three months ended January 31, 2006 are not comparable
to the three months ended October 31, 2005 and are not indicative of the expected results for the
entire fiscal year.
Our effective tax rate for the quarter increased to 52.3% compared
to 38.8% in the prior year. This increase is due to an additional
$3.4 million in income tax expense in the current quarter related to the correction of errors
in state income taxes for periods prior to May 1, 2003. See
discussion of restatement in note 2A to the condensed consolidated financial statements.
Nine months ended January 31, 2006 compared to January 31, 2005
Corporate expenses increased $2.9 million primarily due an increase of $4.6 million in allocated
costs from finance shared services and $1.5 million in additional consulting, accounting and
auditing expenses related to the restatement of our previously issued financial statements. These
increases were partially offset by a decline of $6.1 million in interest expense.
Our consolidated interest expense, both operating and non-operating, totaled $74.3 million for
the nine months ended January 31, 2006, an increase of $9.3 million over the prior year. Of the
$74.3 million in total interest, $37.0 million related to interest expense on previous
acquisitions, with the
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remaining $37.3 million related to our operations recorded directly in our operating segments.
Intercompany interest expense, which is also recorded directly in our operating segments, is
eliminated within the Corporate segment. These eliminations resulted in the decline of $6.1 million
in interest expense recorded in our Corporate segment for the current period.
Information technology department expenses increased $4.2 million primarily due to higher
compensation and benefits. Marketing department expenses increased $6.4 million primarily due to an
increase in digital advertising. Finance department expenses increased $9.5 million, primarily due
to $5.1 million of additional consulting expenses and an increase of $4.5 million in compensation
expenses. Other support department expenses increased $4.8 million primarily due to increases in
stock-based compensation and legal department expenses, partially offset by a decrease in supply
department expenses.
Other income decreased $8.1 million primarily as a result of a $16.7 million legal recovery
received during the prior year, partially offset by a $3.4 million gain recognized on the sale of
an investment in the current year.
The pretax loss was $75.0 million, compared with last year’s loss of $65.5 million.
Our
effective tax rate for the nine months ended January 31, 2006
decreased to 36.8% compared to 38.7% in the prior year. This decrease
is due to an additional $3.4 million in income tax expense in the current quarter related to the correction of errors
in state income taxes for periods prior to May 1, 2003. See
discussion of restatement in note 2A to the condensed consolidated financial statements.
FINANCIAL CONDITION
These comments should be read in conjunction with the condensed consolidated balance sheets
and condensed consolidated statements of cash flows found on pages 1 and 3, respectively.
CAPITAL RESOURCES & LIQUIDITY BY SEGMENT
Our sources of capital include cash from operations, issuances of common stock and debt. We use
capital primarily to fund working capital requirements, pay dividends, repurchase our shares and
acquire businesses.
Cash From Operations. Cash used in operations totaled $1.7 billion and $1.6 billion for the
nine months ended January 31, 2006 and 2005, respectively. The increase in cash used in operating
activities is primarily due to increases in mortgage loans held for sale and MSRs during the
current year and increased losses. These items were partially offset by a decline in income tax
payments. Income tax payments totaled $224.8 million during the current year, a decrease of $181.8
million from the prior year.
Issuance of Common Stock. We issue shares of common stock, in accordance with our stock-based
compensation plans, out of treasury shares. Proceeds from the issuance of common stock totaled
$105.8 million and $119.9 million for the nine months ended January 31, 2006 and 2005,
respectively.
Dividends. Dividends paid totaled $118.7 million and $106.4 million for the nine months ended
January 31, 2006 and 2005, respectively. On June 8, 2005, our Board of Directors declared a
two-for-one stock split of the Company’s Common Stock in the form of a 100% stock distribution,
effective August 22, 2005, to shareholders of record as of the close of business on August 1,
2005. All share and per share amounts in this document have been adjusted to reflect the
retroactive effect of the stock split.
Share Repurchases. On June 9, 2004, our Board of Directors approved an authorization to
repurchase 15 million shares. During the nine months ended January 31, 2006, we repurchased 9.0
million shares pursuant to this authorization and a prior authorization at an aggregate price of
$254.2 million or an average price of $28.18 per share. There are 10.5 million shares remaining
under this authorization at January 31, 2006. We plan to continue to purchase shares on the open
market in accordance with this authorization, subject to various factors including the price of the
stock, the availability of excess cash, our ability to maintain liquidity and financial
flexibility, securities law restrictions, targeted capital levels and other investment
opportunities available.
Restricted Cash. We hold certain cash balances that are restricted as to use.
Cash and cash equivalents — restricted totaled $430.7 million at January 31, 2006 compared to
$516.9 million at April 30, 2005. Investment Services held $376.0 million of this total
segregated in a special reserve account for the exclusive benefit of customers. Restricted cash
held by Mortgage Services totaled $48.1 million and is held primarily for outstanding commitments
to fund mortgage loans. Restricted
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cash of $6.6 million at January 31, 2006 held by Business Services is related to funds held to pay
payroll taxes on behalf of its customers.
Segment Cash Flows. A condensed consolidating statement of cash flows by segment for the nine
months ended January 31, 2006 follows. Generally, interest is not charged on intercompany
activities between segments.
| (in 000s) | ||||||||||||||||||||||||
| Tax | Mortgage | Business | Investment | Consolidated | ||||||||||||||||||||
| Services | Services | Services | Services | Corporate | H&R Block | |||||||||||||||||||
Cash provided by (used in): |
||||||||||||||||||||||||
Operations |
$ | (1,047,425 | ) | $ | (349,287 | ) | $ | 5,279 | $ | 14,691 | $ | (312,805 | ) | $ | (1,689,547 | ) | ||||||||
Investing |
(49,221 | ) | 72,246 | (220,392 | ) | 9,143 | (66,048 | ) | (254,272 | ) | ||||||||||||||
Financing |
(2,051 | ) | — | (21,013 | ) | 5,642 | 2,321,208 | 2,303,786 | ||||||||||||||||
Net intercompany |
1,315,359 | 281,885 | 250,446 | (10,544 | ) | (1,837,146 | ) | — | ||||||||||||||||
Net intercompany activities are excluded from investing and financing activities
within the segment cash flows. We believe that by excluding intercompany activities, the cash flows
by segment more clearly depicts the cash generated and used by each segment. Had intercompany
activities been included, those segments in a net lending situation would have been included in
investing activities, and those in a net borrowing situation would have been included in financing
activities.
Tax Services. Tax Services has historically been our largest provider of annual operating cash
flows. The seasonal nature of Tax Services generally results in a large positive operating cash
flow in the fourth quarter. Tax Services used $1.0 billion in its current nine-month operations to
cover off-season costs and working capital requirements. Cash used for seasonal working capital
requirements was partially offset by a signing bonus received from HSBC during the second quarter
in connection with the execution of a RAL distribution agreement. The signing bonus was recorded as
deferred revenue at January 31, 2006. This segment also used $49.2 million in investing activities,
primarily related to capital expenditures and acquisitions.
Mortgage Services. This segment primarily generates cash as a result of the sale and
securitization of mortgage loans and residual interests, and as its residual interests begin to
cash flow. Mortgage Services used $349.3 million in cash from operating activities primarily due to
a $192.0 million increase in mortgage loans held for sale at January 31, 2006. Additionally, net
additions to MSRs totaled $95.8 million and servicing advances increased $61.5 million. Cash flows
from investing activities consist of $74.9 million in cash receipts on residual interests and $30.5
million in cash received for the sale of residual interests, partially offset by $32.9 million in
capital expenditures.
Warehouse funding. To finance our prime originations, we utilize an on-balance
sheet warehouse facility with capacity up to $25 million. This annual facility bears interest at
one-month LIBOR plus 140 to 200 basis points. As of January 31, 2006 and April 30, 2005, the
balance outstanding under this facility was $0.4 million and $4.4 million, respectively.
To fund our non-prime originations, we utilize nine off-balance sheet warehouse Trusts. The
facilities used by the Trusts had a total committed capacity of $15.0 billion as of January 31,
2006. Amounts drawn on the facilities by the Trusts totaled $11.2 billion at January 31, 2006. See
additional discussion below in “Off-Balance Sheet Financing Arrangements.”
We believe the sources of liquidity available to the Mortgage Services segment are sufficient
for its needs.
Business Services. Business Services funding requirements are largely related to receivables
for completed work and “work in process.” We provide funding sufficient to cover their working
capital needs. This segment provided $5.3 million in operating cash flows during the first nine
months of the year. Business Services used $220.4 million in investing activities primarily related
to the American Express Tax and Business Services, Inc. acquisition and, to a lesser extent,
capital expenditures.
Investment Services. Investment Services, through HRBFA, is subject
to regulatory requirements intended to ensure the general financial soundness and liquidity of
broker-dealers. At
January 31, 2006, HRBFA’s net capital of $117.6 million, which was 20.1% of aggregate debit items,
exceeded its minimum required net capital of $11.7 million by $105.9 million.
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In the first nine months of fiscal year 2006, Investment Services provided $14.7 million in
cash from its operating activities primarily due to working capital changes, including the timing
of cash deposits that are restricted for the benefit of customers.
Liquidity needs relating to client trading and margin-borrowing activities are met primarily
through cash balances in client brokerage accounts and working capital. We believe these sources of
funds will continue to be the primary sources of liquidity for Investment Services. Stock loans
have historically been used as a secondary source of funding and could be used in the future, if
warranted.
Pledged securities at January 31, 2006 totaled $51.9 million, an excess of $11.7 million over
the margin requirement. Pledged securities at the end of fiscal year 2005 totaled $44.6 million, an
excess of $7.9 million over the margin requirement.
We believe the funding sources for Investment Services are stable. Liquidity risk within this
segment is primarily limited to maintaining sufficient capital levels to obtain securities lending
liquidity to support margin borrowing by customers.
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
Substantially all non-prime mortgage loans we originate are sold daily to the Trusts. The Trusts
purchase the loans from us utilizing nine warehouse facilities that were arranged by us, bear
interest at one-month LIBOR plus 45 to 400 basis points and expire on various dates during the
year. During the third quarter, the warehouse facilities were increased from $13.5 billion to $15.0
billion. An additional uncommitted facility of $1.5 billion brings total capacity to $16.5 billion.
There have been no other material changes in our off-balance sheet financing arrangements from
those reported at April 30, 2005 in our Annual Report on Form 10-K/A.
COMMERCIAL PAPER ISSUANCE AND SHORT-TERM BORROWINGS
We maintain two unsecured CLOCs for working capital, support of our commercial paper program and
general corporate purposes. In August 2005, the first CLOC expired and was replaced with a new $1.0
billion CLOC, which expires in August 2010. Also in August 2005, the second CLOC was extended, and
now expires in August 2010. These CLOCs were undrawn at January 31, 2006.
We obtained an additional $900.0 million line of credit for the period of January 3 to
February 24, 2006 to back-up peak commercial paper issuance or use as an alternate source of
funding for RAL participations. This line is subject to various covenants, substantially similar to
the primary CLOCs. The balance outstanding on this facility at January 31, 2006 was $550.0 million.
There have been no other material changes in our commercial paper program from those reported
at April 30, 2005 in our Annual Report on Form 10-K/A.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As
a result of our failure to file this Form 10-Q by the SEC’s
prescribed due date, we will be unable to issue any debt securities
under our shelf registration statement for a period of twelve
calendar months after the month of our filing.
There
have been no other material changes in our contractual obligations and commercial commitments from
those reported at April 30, 2005 in our Annual Report on Form 10-K/A.
REGULATORY ENVIRONMENT
There have been no material changes in our regulatory environment from those reported at April 30,
2005 in our Annual Report on Form 10-K/A.
FORWARD-LOOKING INFORMATION
In this report, and from time to time throughout the year, we share our expectations for our future
performance. These forward-looking statements are based upon current information, expectations,
estimates and projections regarding the Company, the industries and markets in which we operate,
and our assumptions and beliefs at that time. These statements speak only as of the date on which
they are made, are not guarantees of future performance, and involve certain risks, uncertainties
and assumptions, which are difficult to predict. Therefore, actual outcomes and results could
materially differ from what is expressed, implied or forecast in these forward-looking statements.
Words such as “believe,” “will,” “plan,” “expect,” “intend,” “estimate,” “approximate,” and similar
expressions may identify such forward-looking statements.
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There have been no material changes in our risk factors from those reported at April 30, 2005
in our Annual Report on Form 10-K/A.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
We report our financial results in accordance with generally accepted accounting principles (GAAP).
However, we believe certain non-GAAP performance measures and ratios used in managing the business
may provide additional meaningful comparisons between current year results and prior periods, by
excluding certain items that do not represent results from our basic operations. Reconciliations to
GAAP financial measures are provided below. These non-GAAP financial measures should be viewed in
addition to, not as an alternative for, our reported GAAP results.
Origination Margin
| (dollars in 000s) | |||||||||||||||||||||
| Three months ended | Nine months ended | ||||||||||||||||||||
| Restated | Restated | ||||||||||||||||||||
| January 31, | January 31, | October 31, | January 31, | January 31, | |||||||||||||||||
| 2006 | 2005 | 2005 | 2006 | 2005 | |||||||||||||||||
Total expenses |
$ | 229,040 | $ | 193,389 | $ | 239,912 | $ | 694,922 | $ | 532,197 | |||||||||||
Add: Expenses netted against
gain on sale revenues |
85,974 | 102,878 | 120,981 | 321,177 | 275,217 | ||||||||||||||||
Less: |
|||||||||||||||||||||
Cost of services |
83,076 | 56,766 | 67,811 | 215,279 | 159,558 | ||||||||||||||||
Cost of acquisition |
24,305 | 50,084 | 50,591 | 127,201 | 122,194 | ||||||||||||||||
Allocated support departments |
6,549 | 6,244 | 6,793 | 19,173 | 18,391 | ||||||||||||||||
Other |
11,291 | 6,900 | 10,300 | 29,891 | 10,900 | ||||||||||||||||
| $ | 189,793 | $ | 176,273 | $ | 225,398 | $ | 624,555 | $ | 496,371 | ||||||||||||
Divided by origination volume |
$ | 8,952,487 | $ | 8,393,735 | $ | 12,620,808 | $ | 32,460,924 | $ | 21,723,235 | |||||||||||
Total cost of origination |
2.12 | % | 2.10 | % | 1.79 | % | 1.92 | % | 2.28 | % | |||||||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks from those reported at April 30, 2005
in our Annual Report on Form 10-K/A.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have established disclosure controls and procedures (Disclosure Controls) to ensure that
information required to be disclosed in the Company’s reports filed under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure Controls are
also designed to ensure that such information is accumulated and communicated to management,
including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our Disclosure Controls were designed to provide reasonable assurance that the controls and
procedures would meet their objectives. Our management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that our Disclosure Controls will prevent all error and
all fraud. A control system, no matter how well designed and operated, can provide only reasonable
assurance of achieving the designed control objectives and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusions of two or more people, or
by
management override of the control. Because of the inherent limitations in a cost-effective,
maturing control system, misstatements due to error or fraud may occur and not be detected.
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As of the end of the period covered by this Form 10-Q, we evaluated the effectiveness of the
design and operation of our Disclosure Controls. The controls evaluation was done under the
supervision and with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, and included consideration of the material weakness initially disclosed in
our Annual Report on Form 10-K/A for the year ended April 30, 2005. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our Disclosure Controls and
procedures were not effective as of the end of the period covered by this Quarterly Report on Form
10-Q because of the material weakness described below.
As disclosed initially in our Annual Report on Form 10-K/A for the year ended April 30, 2005,
management identified a material weakness in our accounting for income taxes. Specifically, the
Company did not maintain sufficient resources in the corporate tax function to accurately identify,
evaluate and report, in a timely manner, non-routine and complex transactions. In addition, the
Company had not completed the requisite historical analysis and related reconciliations to ensure
tax balances were appropriately stated prior to the completion of the Company’s April 30, 2005
internal control activities.
In February 2006, as a result of the ongoing controls and procedural work to remediate the
material weakness in the Company’s internal controls over accounting for income taxes as of April
30, 2005, management discovered additional income tax errors which required the restatement of
prior periods. In preparation for its 10-Q filing, management reviewed this disclosure and believes
it accurately describes the nature of the internal control deficiencies that contributed to the
material weakness as of April 30, 2005.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In order to remediate the aforementioned material weakness, management completed the requisite
historical analysis including creation of the necessary tax basis balance sheets and current and
deferred reconciliations required and related internal control testing to ensure propriety of all
tax related financial statement account balances as of the Form 10-K/A filing date. The Company
believes it established appropriate controls and procedures and created appropriate tax account
analysis and support subsequent to April 30, 2005.
Additionally, in our efforts to remediate the material weakness management has engaged a
third-party firm to assist us in performing a comprehensive evaluation of the corporate tax
function, including resource requirements. Since August 1, 2005, we have hired a Senior Vice
President — Corporate Tax, an Income Tax Accounting Manager, a Corporate Tax Manager and two
additional Tax Analysts. In addition to implementing management’s action plan addressing items from
the comprehensive evaluation, we will continue to monitor the improvements in the controls over
accounting for income taxes to ensure remediation of the material weakness.
Other than the changes outlined above, there were no changes that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information below should be read in conjunction with the information included in note 12
to our condensed consolidated financial statements.
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RAL LITIGATION
We reported in current reports on Form 8-K, previous quarterly reports on Form 10-Q, and in our
annual report on Form 10-K/A for the year ended April 30, 2005, certain events and information
regarding lawsuits throughout the country regarding our refund anticipation loan programs
(collectively, “RAL Cases”). The RAL Cases have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other things, disclosures in the RAL
applications were inadequate, misleading and untimely; the RAL interest rates were usurious and
unconscionable; we did not disclose that we would receive part of the finance charges paid by the
customer for such loans; breach of state laws on credit service organizations; breach of contract,
unjust enrichment, unfair and deceptive acts or practices; violations of the federal Racketeer
Influenced and Corrupt Organizations Act; violations of the federal Fair Debt Collection Practices
Act; and breach of fiduciary duty to our customers in connection with the RAL program.
The amounts claimed in the RAL Cases have been very substantial in some instances. We have
successfully defended against numerous RAL Cases, although several of the RAL Cases are still
pending. Of the RAL Cases that are no longer pending, some were dismissed on our motions for
dismissal or summary judgment, and others were dismissed voluntarily by the plaintiffs after denial
of class certification. Other cases have been settled, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the “Texas RAL Settlement”). On December 21, 2005, we
entered into a settlement agreement, subject to final court approval, regarding four RAL Cases
entitled Deadra D. Cummins, et al. v. H&R Block, Inc. et al.; Mitchell v. H&R Block, Inc. et al.;
Green v. H&R Block, Inc. et al.; and Becker v. H&R Block, Inc. (the “Cummins Settlement
Agreement”). Pursuant to the terms of the Cummins Settlement Agreement, we will contribute a total
of up to $62.5 million in cash for purposes of making payments to the settlement class, paying all
attorneys’ fees and costs to class counsel and covering service awards to the representative
plaintiffs. In addition, we will pay costs for providing notice of the settlement to settlement
class members. We recorded a reserve of $52.2 million related to this settlement in our third
quarter.
We believe we have meritorious defenses to the RAL Cases and we intend to defend the remaining
RAL Cases vigorously. There can be no assurances, however, as to the outcome of the pending RAL
Cases individually or in the aggregate. Likewise, there can be no assurances regarding the impact
of the RAL Cases on our financial statements. We have accrued our best estimate of the probable
loss related to the RAL Cases. The following is updated information regarding the pending RAL Cases
that are class actions or putative class actions in which developments occurred during or after the
three months ended January 31, 2006:
Lynne A. Carnegie, et al. v. Household International, Inc., H&R Block, Inc., et al., (formerly
Joel E. Zawikowski, et al. v. Beneficial National Bank, H&R Block, Inc., Block Financial
Corporation, et al.) Case No. 98 C 2178, United States District Court for the Northern District of
Illinois, Eastern Division, instituted on April 18, 1998. In March 2004, the court either dismissed
or decertified all of the plaintiffs’ claims other than part of one count alleging violations of
the racketeering and conspiracy provisions of the Racketeer Influenced and Corrupt Organizations
Act. On January 23, 2006, the court granted our motion for partial summary judgment applying a
four-year RICO statute of limitations to the plaintiffs’ claims, reducing the class period to
primarily the 1995 and 1996 tax seasons and reducing the class size to approximately 1.7 million
members. This class action case is scheduled to go to trial on May 15, 2006. We intend to continue
defending the case vigorously, but there are no assurances as to its outcome. We have, however,
engaged in settlement discussions with counsel for the plaintiffs and, while no definitive
agreement has been reached, plan to pursue those negotiations to either conclusion or take the
matter to trial. During the quarter ended January 31, 2006, we increased our legal reserves related
to this matter by $19.5 million in connection with these developments.
Deadra D. Cummins, et al. v. H&R Block, Inc., et al., Case No. 03-C-134 in the Circuit Court
of Kanawha County, West Virginia, instituted on January 22, 2003. This case is stayed and will be
resolved as part of the Cummins Settlement Agreement, subject to final approval.
Joyce Green, et al. v. H&R Block, Inc., Block Financial Corporation, et al., Case No.
97195023, in the Circuit Court for Baltimore City, Maryland, instituted on July 14, 1997. This case
is stayed and will be resolved as part of the Cummins Settlement Agreement, subject to final
approval.
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Levon and Geral Mitchell, et al. v. H&R Block,, Inc. and Ruth Wren, Case No. CV-95-2067, in
the Circuit Court of Mobile County, Alabama, instituted on June 13, 1995. This case is stayed and
will be resolved as part of the Cummins Settlement Agreement, subject to final approval.
Lynn Becker v. H&R Block, Inc., Case No. CV-2004-03-1680 in the Court of Common Pleas, Summit
County, Ohio, Instituted on April 15, 2004. This case is stayed and will be resolved as part of
the Cummins Settlement Agreement, subject to final approval.
On February 15, 2006, the California attorney general filed a lawsuit in the Superior Court of
California, City and County of San Francisco entitled The People of California v. H&R Block, Inc.,
H&R Block Services, Inc., H&R Block Enterprises, Inc., H&R Block Tax Services, Inc., Block
Financial Corporation, HRB Royalty, Inc. and Does 1 through 50. The complaint alleges, among
other things, untrue, misleading or deceptive statements in marketing RALS and unfair competition
with respect to debt collection activities. The complaint seeks equitable relief, civil penalties
and restitution. We intend to defend the case vigorously, but there are no assurances as to its
outcome.
PEACE OF MIND LITIGATION
Lorie J. Marshall, et al. v. H&R Block Tax Services, Inc., et al., Civil Action 2003L000004, in the
Circuit Court of Madison County, Illinois, is a class action case filed on January 18, 2002, that
was granted class certification on August 27, 2003. Plaintiffs’ claims consist of five counts
relating to the Peace of Mind (POM) program under which the applicable tax return preparation
subsidiary assumes liability for additional tax assessments attributable to tax return preparation
error. The plaintiffs allege that the sale of POM guarantees constitutes (i) statutory fraud by
selling insurance without a license, (ii) an unfair trade practice, by omission and by “cramming”
(i.e., charging customers for the guarantee even though they did not request it or want it), and
(iii) a breach of fiduciary duty. In August 2003, the court certified the plaintiff classes
consisting of all persons who from January 1, 1997 to final judgment (i) were charged a separate
fee for POM by “H&R Block” or a defendant H&R Block class member; (ii) reside in certain class
states and were charged a separate fee for POM by “H&R Block” or a defendant H&R Block class member
not licensed to sell insurance; and (iii) had an unsolicited charge for POM posted to their bills
by “H&R Block” or a defendant H&R Block class member. Persons who received the POM guarantee
through an H&R Block Premium office and persons who reside in Alabama are excluded from the
plaintiff class. The court also certified a defendant class consisting of any entity with names
that include “H&R Block” or “HRB,” or are otherwise affiliated or associated with H&R Block Tax
Services, Inc., and that sold or sells the POM product. The trial court subsequently denied the
defendants’ motion to certify class certification issues for interlocutory appeal. Discovery is
proceeding. No trial date has been set.
There is one other putative class action pending against us in Texas that involves the POM
guarantee. This case is being tried before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs’ attorneys that are involved in the Marshall litigation in
Illinois, and contains similar allegations. No class has been certified in this case.
We believe the claims in the POM action are without merit, and we intend to defend them
vigorously. The amounts claimed in the POM actions are substantial, however, and there can be no
assurances as to the outcome of these pending actions individually or in the aggregate. Likewise,
there can be no assurances regarding the impact of these actions on our consolidated financial
statements.
OTHER CLAIMS AND LITIGATION
As reported previously, the NASD brought charges against HRBFA regarding the sale by HRBFA of
Enron debentures in 2001. A hearing for this matter is scheduled for May 2, 2006. We intend to
defend the NASD charges vigorously, although there can be no assurances regarding the outcome and
resolution of the matter.
As part of an industry-wide review, the IRS is investigating tax-planning strategies that
certain RSM clients utilized during fiscal years 2000 through 2003. Specifically, the IRS is
examining these strategies to determine whether RSM complied with tax shelter registration and
listing regulations and whether such strategies were appropriate. If the IRS were to determine that
these strategies were inappropriate, clients that utilized the strategies could face penalties and
interest for underpayment of taxes. Some of these clients are seeking or may attempt to seek
recovery from
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RSM. While there can be no assurance regarding the outcome of these matters, we do not believe its
resolution will have a material adverse effect on our operations or consolidated financial
statements.
On March 15, 2006, the New York Attorney General filed a lawsuit in the Supreme Court of the
State of New York, County of New York entitled The People of New York v. H&R Block, Inc. and H&R
Block Financial Services, Inc. The complaint alleges fraudulent business practices, deceptive
acts and practices, common law fraud and breach of fiduciary duty with respect to the Express IRA
product. The complaint seeks equitable relief, disgorgement of profits, damages and restitution,
civil penalties and punitive damages. A number of civil actions were subsequently filed against us
concerning the matter. We intend to defend these cases vigorously, but there are no assurances as
to their outcome.
On or about March 16, 2006, two shareholder derivative actions were initiated against the
Board of Directors and certain company officers. The cases involve claims that the defendants
failed to properly manage certain company activities resulting in a restatement of financial
results due to state tax miscalculations. These cases are pending in the Circuit Court of Jackson
County, Missouri and are styled Priscilla Fisk v. Mark A. Ernst, Jeffrey E. Nachbor, William L.
Trubeck, Melanie K. Coleman, Frank J. Cotroneo, Thomas M. Bloch, Donna R. Ecton, Henry F. Frigon,
Roger W. Hale, Len J. Lauer, David Baker Lewis, Tom D. Seip, Louis W. Smith, Ray Wilkins Jr. and
Kenneth Baum. The plaintiff in the second action is Robert Lang. The named defendants in the Lang
matter are the same as in Fisk. We intend to defend these cases vigorously, but there are no
assurances as to their outcome.
Subsequent to February 2006, a number of putative
class actions alleging violations of certain securities laws were filed. The actions seek
unspecified damages and equitable relief. We intend to defend these cases vigorously, but there are
no assurances as to its outcome.
We have from time to time been party to claims and lawsuits not discussed herein arising out
of our business operations. These claims and lawsuits include actions by state attorneys general,
individual plaintiffs, and cases in which plaintiffs seek to represent a class of similarly
situated customers. The amounts claimed in these claims and lawsuits are substantial in some
instances, and the ultimate liability with respect to such litigation and claims is difficult to
predict. Some of these claims and lawsuits pertain to RALs, the electronic filing of customers’
income tax returns, the POM guarantee program and our Express IRA program. We believe we have
meritorious defenses to each of these claims, and we are defending or intend to defend them
vigorously, although there is no assurance as to their outcome.
In addition to the aforementioned types of cases, we are parties to claims and lawsuits that
we consider to be ordinary, routine litigation incidental to our business, including claims and
lawsuits (“Other Claims”) concerning investment products, the preparation of customers’ income tax
returns, the fees charged customers for various products and services, losses incurred by customers
with respect to their investment accounts, relationships with franchisees, denials of mortgage
loans, contested mortgage foreclosures, other aspects of the mortgage business, intellectual
property disputes, employment matters and contract disputes. We believe we have meritorious
defenses to each of the Other Claims, and we are defending them vigorously. While we cannot provide
assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are
required to pay in the discharge of liabilities or settlements in these Other Claims will not have
a material adverse effect on our consolidated financial statements.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
A summary of our purchases of H&R Block common stock during the third quarter of fiscal year
2006 is as follows:
| (shares in 000s) | ||||||||||||||||
| Total Number of Shares | Maximum Number | |||||||||||||||
| Total | Average | Purchased as Part of | of Shares that May | |||||||||||||
| Number of Shares | Price Paid | Publicly Announced | Be Purchased Under | |||||||||||||
| Purchased (1) | per Share | Plans or Programs (2) | the Plans or Programs (2) | |||||||||||||
November 1 — November 30 |
— | $ | — | — | 10,494 | |||||||||||
December 1 — December 31 |
2 | $ | 24.97 | — | 10,494 | |||||||||||
January 1 — January 31 |
11 | $ | 25.50 | — | 10,494 | |||||||||||
| (1) | All shares were purchased in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on restricted shares. | |
| (2) | On June 9, 2004, our Board of Directors approved the repurchase of 15 million shares of H&R Block, Inc. common stock. This authorization has no expiration date. |
ITEM 6. EXHIBITS
| 10.1 | Amendment Number One to the Amended and Restated Sale and Servicing Agreement dated November 11, 2005 among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2003-5, and Wells Fargo Bank, N.A. | ||
| 10.2 | Amendment Number Four to the Second Amended and Restated Sale and Servicing Agreement dated March 8, 2005 among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2001-2, and Wells Fargo Bank, N.A. | ||
| 10.3 | Amendment Number Seven to the Amended and Restated Note Purchase Agreement dated November 25, 2003 among Option One Loan Warehouse Corporation, the Option One Owner Trust 2001-2, and Bank of America, N.A. | ||
| 10.4 | Amendment Number Eight to the Amended and Restated Indenture dated as of November 25, 2003 between Option One Owner Trust 2001-2 and Wells Fargo Bank, N.A. | ||
| 10.5 | Agreement of Settlement dated December 23, 2005 among H&R Block, Inc., H&R Block Services, Inc., H&R Block Tax Services, Inc., Block Financial Corporation, HRB Royalty, Inc., H&R Block Eastern Enterprises, Inc., Deadra D. Cummins, Ivan and LaDonna Bell, Levon Mitchell, Geral Mitchell, Joyce Green, Lynn Becker, Justin Sevey, Maryanne Hoekman and Renea Griffith.* | ||
| 10.6 | Sale and Servicing Agreement dated as of December 30, 2005, among Option One Mortgage Corporation, Option One Loan Warehouse Corporation, Option One Owner Trust 2005-9, and Wells Fargo Bank, N.A. | ||
| 10.7 | Note Purchase Agreement dated as of December 30, 2005, among Option One Loan Warehouse Corporation, Option One Owner Trust 2005-9, DB Structured Products, Inc., Gemini Securitization Corp., LLC, Aspen Funding Corp. and Newport Funding Corp. | ||
| 10.8 | Indenture dated as of December 30, 2005, between Option One Owner Trust 2005-9 and Wells Fargo Bank, N.A. | ||
| 31.1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31.2 | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32.1 | Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32.2 | Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Confidential information has been omitted from this exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| H&R BLOCK, INC. | ||
 |
||
| Mark A. Ernst | ||
| Chairman of the Board, President | ||
| and Chief Executive Officer | ||
| March 31, 2006 | ||
 |
||
| William L. Trubeck | ||
| Executive Vice President and | ||
| Chief Financial Officer | ||
| March 31, 2006 | ||
 |
||
| Jeffrey E. Nachbor | ||
| Senior Vice President and | ||
| Corporate Controller | ||
| March 31, 2006 |
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Exhibit 10.1
AMENDMENT NUMBER ONE
to the
AMENDED AND RESTATED SALE AND SERVICING AGREEMENT,
dated as of November 12, 2004,
among
OPTION ONE OWNER TRUST 2003-5,
OPTION ONE LOAN WAREHOUSE CORPORATION,
OPTION ONE MORTGAGE CORPORATION
and
WELLS FARGO BANK, N.A.
to the
AMENDED AND RESTATED SALE AND SERVICING AGREEMENT,
dated as of November 12, 2004,
among
OPTION ONE OWNER TRUST 2003-5,
OPTION ONE LOAN WAREHOUSE CORPORATION,
OPTION ONE MORTGAGE CORPORATION
and
WELLS FARGO BANK, N.A.
This AMENDMENT NUMBER ONE (this “Amendment”) is made and is effective as of this 11th day of
November, 2005, among Option One Owner Trust 2003-5 (the “Issuer”), Option One Loan Warehouse
Corporation (the “Depositor”), Option One Mortgage Corporation (the “Loan Originator” and the
“Servicer”) and Wells Fargo Bank, N.A., (formerly known as Wells Fargo Bank Minnesota, National
Association) as Indenture Trustee (the “Indenture Trustee”), to the Amended and Restated Sale and
Servicing Agreement, dated as of November 12, 2004 (the “Sale and Servicing Agreement”), among the
Issuer, the Depositor, the Loan Originator, the Servicer and the Indenture Trustee.
RECITALS
WHEREAS, the parties hereto desire to amend the Sale and Servicing Agreement subject to the
terms and conditions of this Amendment.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and of the mutual covenants herein contained, the parties hereto hereby agree
as follows:
SECTION 1. Defined Terms. Any terms capitalized but not otherwise defined herein
shall have the respective meanings set forth in the Sale and Servicing Agreement.
SECTION 2. Amendments. (A) Section 1.01 of the Sale and Servicing Agreement
is hereby amended by adding the following definition:
Interest-Only Loan: A loan which, by its terms, requires the related Borrower
to make monthly payments of only accrued interest for the certain period of time
following origination. After such interest-only period, the loan terms provide that
the Borrower’s monthly payment will be recalculated to cover both interest and
principal so that such loan will amortize fully on or prior to its final payment
date. Each Interest-Only Loan shall be identified as such on the Loan Schedule, and
shall have an interest-only period of five years or as otherwise designated in the
Loan Schedule.
(B) Section 1.01 of the Sale and Servicing Agreement is hereby amended by amending the
definition of the term “Revolving Period” in its entirety to read as follows:
Revolving Period: With respect to the Notes, the period commencing on November
11, 2005 and ending on the earlier of (i) 364 days after such date, and (ii) the
date on which the Revolving Period is terminated pursuant to Section 2.07.
(C) Section 2.03(b) of the Sale and Servicing Agreement is amended in its entirety to
read as follows:
(b) It is the intention of the parties hereto that, other than for
federal, state and local income or franchise tax purposes (as to which no treatment
is herein contemplated), the transfers and assignments of the Trust Estate on the
initial Closing Date, on each Transfer Date and as otherwise contemplated by the
Basic Documents and the Assignments shall constitute a sale of the Trust Estate
including, without limitation, the Loans and all other property comprising the
Trust Estate specified in Section 2.01(a) hereof, from the Depositor to the Issuer
and such property shall not be property of the Depositor. The parties hereto shall
treat the Notes as indebtedness for federal, state and local income and franchise
tax purposes.
(D) Section 3.01(e) of the Sale and Servicing Agreement is amended in its entirety to
read as follows:
(e) There are no actions or proceedings against, or investigations of,
the Depositor currently pending with regard to which the Depositor has received
service of process and no action or proceeding against, or investigation of, the
Depositor is, to the knowledge of the Depositor, threatened or otherwise pending
before any court, administrative agency or other tribunal that (A) if determined
adversely to the Depositor, has a reasonable possibility of prohibiting or
preventing its entering into any of the Basic Documents to which it is a party or
render the Securities invalid, (B) seek to prevent the issuance of the Securities
or the consummation of any of the transactions contemplated by any of the Basic
Documents to which it is a party or (C) if determined adversely to the Depositor,
would prohibit or materially and adversely affect the performance by the Depositor
of its obligations under, or the validity or enforceability of, any of the Basic
Documents to which it is a party or the Securities, provided, however, that,
insofar as this representation relates to the Loan Originator’s satisfaction of its
financial covenants, there is also a reasonable possibility of an adverse
determination of such action, proceeding or investigation having such effect;
2
(E) Section 3.02(e) of the Sale and Servicing Agreement is amended in its entirety to
read as follows:
(e) There are no actions or proceedings against, or investigations of,
the Loan Originator currently pending with regard to which the Loan Originator has
received service of process and no action or proceeding against, or investigation
of, the Loan Originator is, to the knowledge of the Loan Originator, threatened or
otherwise pending before any court, administrative agency or other tribunal that
(A) if determined adversely to the Loan Originator, would prohibit its entering
into any Basic Document to which it is a party or render the Securities invalid,
(B) seek to prevent the issuance of the Securities or the consummation of any of
the transactions contemplated by any Basic Document to which it is a party or (C)
if determined adversely to the Loan Originator, would have a reasonable possibility
of prohibiting or preventing or materially and adversely affecting the sale of the
Loans to the Depositor, the performance by the Loan Originator of its obligations
under, or the validity or enforceability of, any Basic Document to which it is a
party or the Securities, provided, however, that, insofar as this representation
relates to
the Loan Originator’s satisfaction of its financial covenants, there is also a
reasonable possibility of an adverse determination of such action, proceeding or
investigation having such effect;
(F) Section 3.03(e) of the Sale and Servicing Agreement is amended in its entirety to
read as follows:
(e) There are no actions or proceedings against, or investigations of,
the Servicer currently pending with regard to which the Servicer has received
service of process and no action or proceeding against, or investigation of, the
Servicer is, to the knowledge of the Servicer, threatened or otherwise pending
before any court, administrative agency or other tribunal that (A) if determined
adversely to the Servicer, would prohibit its entering into any Basic Document to
which it is a party, (B) seek to prevent the consummation of any of the
transactions contemplated by any Basic Document to which it is a party, (C) if
determined adversely to the Servicer, would have a reasonable possibility of
prohibiting or materially and adversely affecting the performance by the Servicer
of its obligations under, or the validity or enforceability of, any Basic Document
to which it is a party or the Securities, provided, however, that, insofar as this
representation relates to the Loan Originator’s satisfaction of its financial
covenants, there is also a reasonable possibility of an adverse determination of
such action, proceeding or investigation having such effect, or (D) allege that the
Servicer has engaged in practices, with respect to any of the Loans, that are
predatory, abusive, deceptive or otherwise wrongful under any applicable statute,
regulation or ordinance or that are otherwise actionable and that have a reasonable
possibility of adverse determination;
3
(G) Section 7.02 of the Sale and Servicing Agreement is amended in its entirety to
read as follows:
Section 7.02 Financial Covenants.
(a) Each of the Loan Originator and the Servicer shall maintain a
minimum Tangible Net Worth of $425 million as of any day.
(b) Each of the Loan Originator and the Servicer shall maintain a
ratio of 1.0 or greater at any time pursuant to the Capital Adequacy Test, attached
as Exhibit G hereto.
(c) Neither the Loan Originator nor the Servicer may exceed a maximum
non-warehouse leverage ratio (the ratio of (i) the sum of (A) all funded debt
(excluding debt from H&R Block, Inc. or any of its Affiliates and all non-recourse
debt) less (B) 91% of its mortgage loan inventory held for sale less (C) 90% of
servicing advance receivables (determined and valued in accordance with GAAP) to
(ii) Tangible Net Worth) of 0.50x at any time.
(d) Each of the Loan Originator and the Servicer shall maintain a
minimum liquidity facility (defined as a committed, unsecured, non-amortizing
liquidity facility from H&R Block, Inc. not to mature (scheduled or accelerated)
prior to the Maturity Date) in an amount no less than $150 million. Such facility
from H&R Block,
Inc. cannot contain covenants or termination events more restrictive than the
covenants or termination events contained in the Basic Documents.
(e) Each of the Loan Originator and the Servicer shall maintain a
minimum “Net Income” (defined and determined in accordance with GAAP) of at least
$1 based on the total of the current quarter combined with the previous three
quarters.
(f) Each of the Loan Originator and the Servicer, on a quarterly
basis, shall provide the Noteholder Agent with an Officer’s Certificate stating
that the Loan Originator or the Servicer, as the case may be, is in compliance with
the financial covenants set forth in this Section 7.02 and the details of such
compliance.
(H) Clause (10) of Section 9.01(a) of the Sale and Servicing Agreement is amended in
its entirety to read as follows:
(10) so long as the Servicer or the Loan Originator is an Affiliate of
the Issuer, the occurrence of an Event of Default under the Indenture as a result
of the action or inaction of the Issuer.
(I) Exhibit E to the Sale and Servicing Agreement is hereby amended by amending (xx)
the following representations and warranties:
4
(xx) Except for Interest-Only Loans, Principal payments on the Loan
commenced no more than two months after the proceeds of the Loan were disbursed.
The Loan bears interest at the Loan Interest Rate. With respect to each Loan unless
otherwise stated on the Loan Schedule, the Promissory Note is payable on the first
day of each month in Monthly Payments which, except for Balloon Loans, are
sufficient to fully amortize the original principal balance over the original term
thereof and to pay interest at the related Loan Interest Rate, and, in the case of
each ARM, are changed on each Adjustment Date. The Promissory Note does not permit
negative amortization. No Loan is a Convertible Mortgage Loan;
(J) A new Exhibit G is added to the Sale and Servicing Agreement, in the form appended
to this Amendment.
SECTION 3. Representations. In order to induce the parties hereto to execute and
deliver this Amendment, each of the Issuer and the Depositor hereby jointly and severally
represents to the other parties hereto and the Noteholders that as of the date hereof, after giving
effect to this Amendment, (a) all of its respective representations and warranties in the Note
Purchase Agreement and the other Basic Documents are true and correct, and (b) it is otherwise in
full compliance with all of the terms and conditions of the Sale and Servicing Agreement.
SECTION 4. Guaranty. Reference is hereby made to that certain Guaranty, dated as of
November 1, 2003 (the “Guaranty”), made by H&R Block, Inc. in favor of Wells Fargo Bank Minnesota,
National Association, as indenture trustee. H&R Block, Inc., as guarantor pursuant to the Guaranty,
hereby consents to this Amendment and acknowledges and agrees that the Guaranty shall remain in
full force and effect and shall apply to all of the Guaranteed Obligations (as defined in the
Guaranty), as such term is amended or affected by this Amendment.
SECTION 5. Limited Effect. Except as expressly amended and modified by this Amendment,
the Sale and Servicing Agreement shall continue in full force and effect in accordance with its
terms. Reference to this Amendment need not be made in the Sale and Servicing Agreement or any
other instrument or document executed in connection therewith or herewith, or in any certificate,
letter or communication issued or made pursuant to, or with respect to, the Sale and Servicing
Agreement, any reference in any of such items to the Sale and Servicing Agreement being sufficient
to refer to the Sale and Servicing Agreement as amended hereby.
SECTION 6. Fees and Expenses. The Issuer and the Depositor jointly and severally
covenant to pay as and when billed by the Initial Noteholder all of the reasonable out-of-pocket
costs and expenses incurred in connection with the transactions contemplated hereby and in the
other Basic Documents including, without limitation, (i) all reasonable fees, disbursements and
expenses of counsel to the Initial Noteholder, (ii) all reasonable fees and expenses of the
Indenture Trustee and Owner Trustee and their counsel and (iii) all reasonable fees and expenses of
the Custodian and its counsel.
5
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE APPLIED IN SUCH STATE.
SECTION 8. Counterparts. This Amendment may be executed by each of the parties hereto
on any number of separate counterparts, each of which shall be an original and all of which taken
together shall constitute one and the same instrument.
SECTION 9. Limitation on Liability. It is expressly understood and agreed by the
parties hereto that (a) this Amendment is executed and delivered by Wilmington Trust Company, not
individually or personally, but solely as Owner Trustee of Option One Owner Trust 2003-5 in the
exercise of the powers and authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Issuer is made and intended not as
personal representations, undertakings and agreements by Wilmington Trust Company but is made and
intended for the purpose for binding only the Issuer, (c) nothing herein contained shall be
construed as creating any liability on Wilmington Trust Company, individually or personally, to
perform any covenant either expressed or implied contained herein, all such liability, if any,
being expressly waived by the parties hereto and by any Person claiming by, through or under the
parties hereto and (d) under no circumstances shall Wilmington Trust Company be personally liable
for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or
failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer
under this Amendment or any other related documents.
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered
by their duly authorized officers as of the day and year first above written.
| OPTION ONE OWNER TRUST 2003-5 | ||||
| By: Wilmington Trust Company, not in its | ||||
| individual capacity but solely as owner trustee | ||||
| By: | /s/ Joann A. Rozell | |||
| Name: Joann A. Rozell | ||||
| Title: Financial Services Officer | ||||
| OPTION ONE LOAN WAREHOUSE CORPORATION | ||||
| By: | /s/ Bob Fulton | |||
| Name: Bob Fulton | ||||
| Title: Vice President | ||||
| OPTION ONE MORTGAGE CORPORATION | ||||
| By: | /s/ Bob Fulton | |||
| Name: Bob Fulton | ||||
| Title: Vice President | ||||
| WELLS FARGO BANK, N.A., as Indenture Trustee | ||||
| By: | /s/ Amy Doyle | |||
| Name: Amy Doyle | ||||
| Title: Vice President | ||||
Acknowledged and Agreed as
of the date first above written:
of the date first above written:
H&R BLOCK, INC.
By:
|
/s/ Becky S. Shulman | |||
| Name: Becky S. Shulman | ||||
| Title: Vice President and Treasurer | ||||
EXHIBIT G
Capital Adequacy Test
*For each field multiply the HRB% by the Balance Sheet Amount for Required Capital
*For each field multiply the HRB% by the Balance Sheet Amount for Required Capital
| HRB TEST | Balance Sheet | Required Capital | ||||||||||
Unrestricted Cash and Equivalents |
0 | % | ||||||||||
Restricted Cash |
0 | % | ||||||||||
Loans Held for Sale |
9 | % | ||||||||||
Servicing Advances |
10 | % | ||||||||||
Beneficial Interests in trusts |
10 | % | ||||||||||
Subprime Mortgage NIM Residual Interest |
60 | % | ||||||||||
Real Estate Held for Sale |
10 | % | ||||||||||
Furniture and Equipment |
0 | % | ||||||||||
Mortgage Servicing Rights |
25 | % | ||||||||||
Prepaid Expenses and Other Assets |
10 | % | ||||||||||
Accrued interest receivable |
10 | % | ||||||||||
Receivable from H&R Block |
0 | % | ||||||||||
Intangibles and goodwill |
100 | % | ||||||||||
Deferred Tax Assets |
10 | % | ||||||||||
Derivative Assets |
10 | % | ||||||||||
Total Required Capital |
||||||||||||
Total Owners Equity on Balance Sheet Date
Less: Receivables from H&R Block / Adjusted Net Worth
Adjusted Net Worth divided by Required Capital = Ratio for Capital Adequacy Test
Exhibit 10.2
AMENDMENT NUMBER FOUR
to the
SECOND AMENDED AND RESTATED SALE AND SERVICING AGREEMENT,
Dated as of March 8, 2005,
among
OPTION ONE OWNER TRUST 2001-2,
OPTION ONE LOAN WAREHOUSE CORPORATION,
OPTION ONE MORTGAGE CORPORATION
and
WELLS FARGO BANK N.A.
to the
SECOND AMENDED AND RESTATED SALE AND SERVICING AGREEMENT,
Dated as of March 8, 2005,
among
OPTION ONE OWNER TRUST 2001-2,
OPTION ONE LOAN WAREHOUSE CORPORATION,
OPTION ONE MORTGAGE CORPORATION
and
WELLS FARGO BANK N.A.
This AMENDMENT NUMBER FOUR (this “Amendment”) is made and is effective as of this 16th day of
December, 2005 (the “Effective Date”), among Option One Owner Trust 2001-2 (the “Issuer”), Option
One Loan Warehouse Corporation (the “Depositor”), Option One Mortgage Corporation (the “Loan
Originator” and the “Servicer”) and Wells Fargo Bank N.A., as Indenture Trustee (the “Indenture Trustee”), to the Second Amended and Restated Sale and Servicing Agreement, dated
as of March 8, 2005, as amended (the “Sale and Servicing Agreement”), among the Issuer, the
Depositor, the Loan Originator, the Servicer and the Indenture Trustee.
RECITALS
WHEREAS, the parties hereto desire to amend the Sale and Servicing Agreement, as more
expressly set forth herein.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and the mutual covenants herein contained, the parties hereto hereby agree as
follows:
SECTION 1. Defined Terms. Any terms capitalized but not otherwise defined herein
shall have the respective meanings set forth in the Sale and Servicing Agreement.
SECTION 2. Amendments.
(A) As of the Effective Date, Section 1.01 of the Sale and Servicing Agreement is hereby
amended by deleting in its entirety the definition of “Collateral Value” and replacing such
definition with the following:
“Collateral Value: (I) With respect to the Advance Note and each Business Day, 100% of the
Note Principal Balance of the Advance Note on such day and (II) with respect to each Loan
and each Business Day, an amount equal to the positive difference, if any, between (a) the
lesser of (1) the Collateral Percentage of the Market Value of such Loan, and (2) 100% of
the Principal Balance of such Loan (other than a Scratch & Dent Loan which shall be 75% of
the Principal Balance thereof) each as of such Business Day, less (b) the aggregate
unreimbursed Servicing Advances attributable to such Loan as of the most recent
Determination Date; provided, however, that the Collateral Value shall be zero
1
with respect to the Advance Note following the occurrence of an Advance Note Event of
Default and with respect to each Loan (1) that the Loan Originator is required to
repurchase pursuant to Section 2.05 or Section 3.06 hereof or (2) which is a Loan of the
type specified in subparagraphs (i)-(xi) hereof and which is in excess of the limits
permitted under subparagraphs(i)-(xi) hereof, or (3) which remains pledged to the Indenture
Trustee later than 180 days after its related Transfer Date, or (4) which has been released
from the possession of the Custodian to the Servicer or any Loan Originator for a period in
excess of 20 days or exceed the 50 Loan limit for released Loans set forth in the Custodial
Agreement, or (5) that is a Loan which is 60 or more days Delinquent or a Foreclosed Loan,
or (6) that is a Mixed Use Loan, or (7) that is a Wet Funded Loan and the related Loan
Documents have not been delivered to the Custodian within fifteen (15) calendar days after
the date of conveyance of such Loan to the Issuer hereunder, or (8) that is a Scratch and
Dent Loan that has not been liquidated within 90 days after the determination of such
deficiency, or (9) that has an original Principal Balance greater than $1,500,000 or (10)
that is a Scratch and Dent Loan for which a description of the related deficiency has not
been reported to the Initial Noteholder within one Business Day of the related Transfer
Date or (11) that has a Fatal Exception; provided, further, that (A)
(i) the aggregate Collateral Value of Loans which are Second Lien Loans may not
exceed 12% of the Maximum Note Principal Balance; provided, that the aggregate Collateral
Value of
Second Lien Loans exclusive of any Second Lien Loans that are Piggy-Backed Loans may not
exceed 5% of the Maximum Note Principal Balance;
(ii) the aggregate Collateral Value of Loans that are High LTV Loans may not
exceed 10% of the Maximum Note Principal Balance;
(iii) the aggregate Collateral Value of Loans which are 30 to 59 days Delinquent as
of the related Determination Date may not exceed 5% of the Maximum Note Principal Balance;
(iv) the aggregate Collateral Value of Loans with an original Principal Balance
greater than $500,000 but less than $1,000,000 may not exceed 20% of the Maximum Note
Principal Balance;
(v) the aggregate Collateral Value of Loans with an original Principal Balance
greater than $1,000,000 may not exceed 5% of the Maximum Note Principal Balance;
(vi) the aggregate Collateral Value of Loans which are classified as “CC” quality
Loans may not exceed 5% of the Maximum Note Principal Balance;
(vii) the aggregate Collateral Value of Loans which are classified as “C” or “CC”
quality Loans may not exceed 8% of the Maximum Note Principal Balance;
(viii) the aggregate Collateral Value of Loans which are Scratch and Dent Loans may
not in the aggregate exceed 5% of the Maximum Note Principal Balance;
(ix) the aggregate Collateral Value of the Loans that are Wet Funded Loans may not
exceed 50% of the Maximum Note Principal Balance; provided, for the last five (5) days
2
of each calendar month and the first eight (8) days of each calendar month, the aggregate
Collateral Value of Loans that are Wet Funded Loans may not exceed 60% of the Maximum Note
Principal Balance;
(x) the aggregate Collateral Value of Loans that conform to Fannie Mae, Freddie
Mac or Ginnie Mae underwriting guidelines may not exceed 20% of the Maximum Note Principal
Balance, and the interest rates of such Loans shall be sufficiently hedged to the
satisfaction of the Initial Noteholder;
(xi) the aggregate Collateral Value of Loans which are Interest-Only Loans may not
in the aggregate exceed 35% of the Maximum Note Principal Balance and
(xii) the aggregate Collateral Value of Advance Receivables shall in no event exceed
$112 million.
(B) each Loan shall be counted in each applicable category in (A) above and may be
counted in 2 or more categories in (A) above at the same time; provided that once the
Collateral Value of any Loan equals zero, it shall not be counted in any category listed in
(A) above.”
(B) As of the Effective Date, Section 1.01 of the Sale and Servicing Agreement is hereby amended by
inserting the following at the end of the definition of “Maximum Cumulative Loss Ratio”:
if for any such year the Pool Factor is 25% or greater.
(C) As of the Effective Date, Section 1.01 of the Sale and Servicing Agreement is hereby amended by
inserting the following definitions:
“Cumulative Loss Ratio”: With respect to all mortgage loans originated in the same calendar
year (each year’s loans being considered as a single pool) and serviced by Option One
(whether or not such mortgage loans are sold or contributed to the Depositor), beginning
with mortgage loans originated in 1997 (measured on a static pool basis) the cumulative
losses on each such pool expressed as a percentage of the original principal balance of
each such pool.
“Pool Factor”: With respect to all mortgage loans originated in the same calendar year
(each year’s loans being considered a single pool), the current principal balance of such
pool divided by the original outstanding principal balance of such pool.
(D) As of the Effective Date, Section 6.01(b) of the Sale and Servicing Agreement is hereby amended
by inserting the following after clause (29) as clause (30):
(30) the Cumulative Loss Ratio for the loans originated in each year, beginning with 1997, for
which the Pool Factor is, as of the Remittance Date for which the report is given, 25% or more.
SECTION 3. Representations. In order to induce the parties hereto to execute and
deliver this Amendment, each of the Issuer, the Depositor and the Loan Originator hereby
3
jointly and severally represents to the other parties hereto and the Noteholders that as of the
date hereof, after giving effect to this Amendment, (a) all of its respective representations and
warranties in the Note Purchase Agreement and the other Basic Documents are true and correct, and
(b) it is otherwise in full compliance with all of the terms and conditions of the Sale and
Servicing Agreement.
SECTION 4. Limited Effect. Except as expressly amended and modified by this
Amendment, the Sale and Servicing Agreement shall continue in full force and effect in accordance
with its terms. Reference to this Amendment need not be made in the Sale and Servicing Agreement or
any other instrument or document executed in connection therewith or herewith, or in any
certificate, letter or communication issued or made pursuant to, or with respect to, the Sale and
Servicing Agreement, any reference in any of such items to the Sale and Servicing Agreement being
sufficient to refer to the Sale and Servicing Agreement as amended hereby.
SECTION 5. Fees and Expenses. The Issuer and the Depositor jointly and severally
covenant to pay as and when billed by the Initial Noteholder all of the reasonable out-of-pocket
costs and expenses incurred in connection with the transactions contemplated hereby and in the
other Basic Documents including, without limitation, (i) all reasonable fees, disbursements and
expenses of counsel to the Initial Noteholder, (ii) all reasonable fees and expenses of the
Indenture Trustee and Owner Trustee and their counsel and (iii) all reasonable fees and expenses of
the Custodian and its counsel.
SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE
APPLIED IN SUCH STATE (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
SECTION 7. Counterparts. This Amendment may be executed by each of the parties
hereto on any number of separate counterparts, each of which shall be an original and all of which
taken together shall constitute one and the same instrument.
SECTION 8. Limitation on Liability. It is expressly understood and agreed by the
parties hereto that (a) this Amendment is executed and delivered by Wilmington Trust Company, not
individually or personally, but solely as Owner Trustee of Option One Owner Trust 2001-2 in the
exercise of the powers and authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Issuer is made and intended not as
personal representations, undertakings and agreements by Wilmington Trust Company but is made and
intended for the purpose for binding only the Issuer, (c) nothing herein contained shall be
construed as creating any liability on Wilmington Trust Company, individually or personally, to
perform any covenant either expressed or implied contained herein, all such liability, if any,
being expressly waived by the parties hereto and by any Person claiming by, through or under the
parties hereto and (d) under no circumstances shall Wilmington Trust Company be personally liable
for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or
failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer
under this Amendment or any other related documents.
4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their duly authorized officers as of the day and year first above
written.
| OPTION ONE OWNER TRUST 2001-2 | ||||
| By: Wilmington Trust Company, not in its individual capacity but solely as owner trustee | ||||
| By: | /s/ Joann A. Rozell | |||
| Name: Joann A. Rozell | ||||
| Title: Assistant Vice President | ||||
| OPTION ONE LOAN WAREHOUSE CORPORATION | ||||
| By: | /s/ CR Fulton | |||
| Name: Charles R. Fulton | ||||
| Title: Assistant Secretary | ||||
| OPTION ONE MORTGAGE CORPORATION | ||||
| By: | /s/ CR Fulton | |||
| Name: Charles R. Fulton | ||||
| Title: Vice President | ||||
| WELLS FARGO BANK N.A., as Indenture Trustee | ||||
| By: | /s/ Darron C. Woodus | |||
| Name: Darron C. Woodus | ||||
| Title: Assistant Vice President | ||||
[Signature Page to Amendment Four to the Second Amended and Restated Sale and Servicing Agreement]
5
Exhibit 10.3
AMENDMENT NUMBER SEVEN
to the
AMENDED AND RESTATED NOTE PURCHASE AGREEMENT,
dated as of November 25, 2003
among
OPTION ONE OWNER TRUST 2001-2,
OPTION ONE LOAN WAREHOUSE CORPORATION
and
BANK OF AMERICA, N.A.
to the
AMENDED AND RESTATED NOTE PURCHASE AGREEMENT,
dated as of November 25, 2003
among
OPTION ONE OWNER TRUST 2001-2,
OPTION ONE LOAN WAREHOUSE CORPORATION
and
BANK OF AMERICA, N.A.
This AMENDMENT NUMBER SEVEN (this “Amendment”) is made and is effective as of this 16th day of
December, 2005 (the “Effective Date”), among Option One Owner Trust 2001-2 (the “Issuer”), Option
One Loan Warehouse Corporation (the “Depositor”) and Bank of America, N.A. (“BofA”, and in its
capacity as Purchaser, the “Purchaser”) to the Amended and Restated Note Purchase Agreement, dated
as of November 25, 2003, as amended (the “Note Purchase Agreement”), among the Issuer, the
Depositor and the Purchaser.
RECITALS
WHEREAS, the Issuer has requested that the Purchaser agree to amend the Note Purchase
Agreement to increase the Maximum Note Principal Balance from $3,500,000,000 to $4,000,000,000 and
the Purchaser has agreed to make such amendments, subject to the terms and conditions of this
Amendment.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and the mutual covenants herein contained, the parties hereto hereby agree as
follows:
SECTION 1. Defined Terms. Any capitalized terms used but not otherwise defined herein shall
have the respective meanings set forth in the Note Purchase Agreement.
SECTION 2. Amendment. As of the Effective Date, the definition of “Maximum Note Principal
Balance” in Section 1.01 is hereby deleted in its entirety and replaced with the following:
“Maximum Note Principal Balance” means, an amount equal to $4,000,000,000, less any reductions
pursuant to Section 2.06 of the Sale and Servicing Agreement.
SECTION 3. Representations. To induce the Purchaser to execute and deliver this Amendment,
each of the Issuer and the Depositor hereby represents to the Purchaser that as of the date hereof,
after giving effect to this Amendment, (a) all of its respective representations and warranties in
the Note Purchase Agreement and the other Basic Documents are true and correct, and (b) it is
otherwise in full compliance with all of the terms and conditions of the Note Purchase Agreement.
1
SECTION 4. Fees and Expenses. The Issuer and the Depositor jointly and severally covenant to
pay as and when billed by the Purchaser all of the reasonable out-of-pocket costs and expenses
incurred in connection with the transactions contemplated hereby and in the other Basic Documents
including, without limitation, (i) all reasonable fees, disbursements and expenses of counsel to
the Purchaser, (ii) all reasonable fees and expenses of the Indenture Trustee and Owner Trustee and
their counsel and (iii) all reasonable fees and expenses of the Custodian and its counsel.
SECTION 5. Limited Effect. Except as expressly amended and modified by this Amendment, the
Note Purchase Agreement shall continue in full force and effect in accordance with its terms.
Reference to this Amendment need not be made in the Note Purchase Agreement or any other instrument
or document executed in connection therewith, or in any certificate, letter or communication issued
or made pursuant to, or with respect to, the Note Purchase Agreement, any reference in any of such
items to the Note Purchase Agreement being sufficient to refer to the Note Purchase Agreement as
amended hereby.
SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE APPLIED IN SUCH
STATE.
SECTION 7. Counterparts. This Amendment may be executed by each of the parties hereto in any
number of separate counterparts, each of which when so executed shall be an original and all of
which taken together shall constitute one and the same instrument.
SECTION 8. Limitation on Liability. It is expressly understood and agreed by the parties
hereto that (a) this Amendment is executed and delivered by Wilmington Trust Company, not
individually or personally, but solely as Owner Trustee of Option One Owner Trust 2001-2 in the
exercise of the powers and authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Issuer is made and intended not as
personal representations, undertakings and agreements by Wilmington Trust Company but is made and
intended for the purpose for binding only the Issuer, (c) nothing herein contained shall be
construed as creating any liability on Wilmington Trust Company, individually or personally, to
perform any covenant either expressed or implied contained herein, all such liability, if any,
being expressly waived by the parties hereto and by any Person claiming by, through or under the
parties hereto and (d) under no circumstances shall Wilmington Trust Company be personally liable
for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or
failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer
under this Amendment or any other related document.
2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered
by their duly authorized officers as of the day and year first above written.
| OPTION ONE OWNER TRUST 2001-2 | ||||
| By: Wilmington Trust Company, not in its individual capacity but solely as owner trustee | ||||
| By: | /s/ Joann A. Rozell | |||
| Name: Joann A. Rozell | ||||
| Title: Assistant Vice President | ||||
| OPTION ONE LOAN WAREHOUSE CORPORATION | ||||
| By: | /s/ CR Fulton | |||
| Name: Charles R. Fulton | ||||
| Title: Assistant Secretary | ||||
| BANK OF AMERICA, N.A. | ||||
| By: | /s/ Garret Dolt | |||
| Name: Garret Dolt | ||||
| Title: Principal | ||||
[Signature Page to Amendment Seven to the Amended and Restated Note Purchase Agreement]
3
Exhibit 10.4
AMENDMENT NUMBER EIGHT
to the
AMENDED AND RESTATED INDENTURE,
dated as of November 25, 2003,
between
OPTION ONE OWNER TRUST 2001-2
and
WELLS FARGO BANK, N.A.
to the
AMENDED AND RESTATED INDENTURE,
dated as of November 25, 2003,
between
OPTION ONE OWNER TRUST 2001-2
and
WELLS FARGO BANK, N.A.
This AMENDMENT NUMBER EIGHT (this “Amendment”) is made and is effective as of this
16th day of December, 2005, between Option One Owner Trust 2001-2 (the “Issuer”) and
Wells Fargo Bank, N.A., as Indenture Trustee (the “Indenture Trustee”), to the Amended and Restated
Indenture, dated as of November 25, 2003 (the “Indenture”), between the Issuer and the Indenture
Trustee.
RECITALS
WHEREAS, the parties hereto desire to amend the Indenture subject to the terms and conditions
of this Amendment.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and the mutual covenants herein contained, the parties hereto hereby agree as
follows:
SECTION 1. Defined Terms. Any terms capitalized but not otherwise defined herein
shall have the respective meanings set forth in the Indenture.
SECTION 2. Amendment. Effective as of December 16, 2005 and notwithstanding anything
to the contrary in Amendment Number Seven, dated December 17, 2004, to the Indenture, Section 1.01
of the Indenture is hereby amended by deleting in its entirety the definition of “Maturity Date”
and replacing it with the following:
“Maturity Date” means, with respect to the Notes, December 15, 2006.
SECTION 3. Representations. In order to induce the parties hereto to execute and
deliver this Amendment, the Issuer hereby represents to the Indenture Trustee and the Noteholders
that as of the date hereof, after giving effect to this Amendment, (a) all of its respective
representations and warranties in the Indenture and the other Basic Documents are true and correct,
and (b) it is otherwise in full compliance with all of the terms and conditions of the Indenture
and the other Basic Documents.
SECTION 4. Limited Effect. Except as expressly amended and modified by this Amendment,
the Indenture shall continue in full force and effect in accordance with its terms. Reference to
this Amendment need not be made in the Indenture or any other instrument or document executed in
connection therewith or herewith, or in any certificate, letter or
1
communication issued or made pursuant to, or with respect to, the Indenture, any reference in any
of such items to the Indenture being sufficient to refer to the Indenture as amended hereby.
SECTION 5. Fees and Expenses. The Issuer covenants to pay as and when billed by the
Initial Noteholder all of the reasonable out-of-pocket costs and expenses incurred in connection
with the transactions contemplated hereby and in the other Basic Documents including, without
limitation, (i) all reasonable fees, disbursements and expenses of counsel to the Initial
Noteholder and (ii) all reasonable fees and expenses of the Indenture Trustee and its counsel.
SECTION 6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS DOCTRINE
APPLIED IN SUCH STATE.
SECTION 7. Counterparts. This Amendment may be executed by each of the parties hereto
on any number of separate counterparts, each of which shall be an original and all of which taken
together shall constitute one and the same instrument.
SECTION 8. Limitation on Liability. It is expressly understood and agreed by the
parties hereto that (a) this Amendment is executed and delivered by Wilmington Trust Company, not
individually or personally, but solely as Owner Trustee of Option One Owner Trust 2001-2 in the
exercise of the powers and authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Issuer is made and intended not as
personal representations, undertakings and agreements by Wilmington Trust Company but is made and
intended for the purpose for binding only the Issuer, (c) nothing herein contained shall be
construed as creating any liability on Wilmington Trust Company, individually or personally, to
perform any covenant either expressed or implied contained herein, all such liability, if any,
being expressly waived by the parties hereto and by any Person claiming by, through or under the
parties hereto and (d) under no circumstances shall Wilmington Trust Company be personally liable
for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or
failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer
under this Amendment or any other related documents.
[signature page follows]
2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered
by their duly authorized officers as of the day and year first above written.
| OPTION ONE OWNER TRUST 2001-2 | ||||
| By: Wilmington Trust Company, not in its individual capacity but solely as owner trustee | ||||
| By: | /s/ Joann A. Rozell | |||
| Name: Joann A. Rozell | ||||
| Title: Assistant Vice President | ||||
| WELLS FARGO BANK, N.A., as Indenture Trustee | ||||
| By: | /s/ Darron C. Woodus | |||
| Name: Darron C. Woodus | ||||
| Title: Assistant Vice President | ||||
[Signature Page to Amendment Eight to Amended and Restated Indenture]
3
Exhibit 10.5
AGREEMENT OF SETTLEMENT
NOTE: CERTAIN MATERIAL HAS BEEN OMITTED FROM THIS AGREEMENT PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 24b-2. THE LOCATIONS OF THESE OMISSIONS ARE INDICATED THROUGHOUT
THE AGREEMENT BY THE FOLLOWING MARKINGS: [***].
This Agreement of Settlement (together with all appendices, exhibits, schedules and
attachments hereto, the “Agreement”), dated as of this 23rd day of December, 2005, is
made by and among; H&R Block, Inc., H&R Block Services, Inc., H&R Block Tax Services, Inc., Block
Financial Corp., HRB Royalty, Inc., and H&R Block Eastern Enterprise, Inc., successor to H&R Block
Eastern Tax Services, Inc., for themselves and all persons or entities acting on their behalf or at
their direction (collectively, the “Settling Defendants”), on the one hand, and Deadra D. Cummins,
Ivan and LaDonna Bell, Levon Mitchell, Geral Mitchell, Joyce Green, Lynn Becker, Justin Sevey,
Maryanne Hoekman, and Renea Griffith (“Plaintiffs”), on behalf of themselves individually and on
behalf of the respective Settlement Classes they seek to represent, as defined in Section II,
Paragraph 2, on the other hand (all of the foregoing mentioned in this sentence, the “Parties”).
This Agreement is intended by the Settling Parties to fully, finally and forever compromise,
resolve, discharge and settle the Released Claims subject to the terms and conditions set forth
below.
I. CLAIMS OF THE PARTIES
1. The Settling Defendants and/or their Affiliates have been involved, together and
separately, in facilitating Refund Anticipation Loans (“RALs”) at some point from at least 1992 to
the present. A RAL is a patented method by which tax customers, for a fee, can take a loan that is
secured by and expected to be repaid from the anticipated proceeds of their tax refunds.
2. On January 22, 2003, a class action was filed in the Circuit Court of Kanawha
County (the “Court”) against some of the Settling Defendants captioned Deadra D. Cummins, et
al. v. H & R Block, Inc., et al. (Civil Action No. 03-C-134) (the “Cummins Action”). A Second
Amended Complaint was filed on October 22, 2004. The Second Amended Complaint alleged that the
Settling Defendants, among others, violated the West Virginia credit service organization statute,
W. Va. § 46A-6C-1 et seq.,
breached fiduciary duties to the plaintiffs, violated the West Virginia Consumer Credit and
Protection Act, breached their contractual obligations to plaintiffs and were unjustly enriched. On
December 30, 2004, the Court appointed Ms. Cummins, Ivan Bell and LaDonna Bell as class
representatives and Brian Glasser of Bailey & Glasser, LLP, class counsel (“Coordinating Counsel”).
The Court certified a class in the Cummins Action that included all West Virginia residents who
obtained Refund Anticipation Loans through any “H&R Block” office in West Virginia from January 1,
1994 to December 31, 2004, as to all claims contained in the plaintiffs’ Second Amended Complaint.
A copy of the class certification order is attached as Exhibit A.
3. On June 13, 1995, a class action was filed in the Circuit Court of Mobile City,
Alabama against some of the Settling Defendants captioned as Mitchell v. H&R Block, Inc. et al.,
Case No. CV-95-2067 (Circuit Court of Mobile City, Ala.) (the “Mitchell Action”). The plaintiffs
allege that certain of the Settling Defendants herein breached fiduciary duties to plaintiffs,
breached their contractual obligations to plaintiffs and were unjustly enriched by offering RALs.
On July 11, 2003, the Court appointed Levon Mitchell and Geral Mitchell as class representatives.
The Court appointed Steve Martino, W. Lloyd Copeland of Taylor, Martino & Hedge, PC; Michael B.
Hyman of Much, Shelist, Freed, Denenberg, Ament & Rubenstein; and Steven E. Angstreich of Levy,
Angstreich, Finney, Baldante, Rubenstein and Coren, P.C., as class counsel in the Mitchell Action.
The Court certified two classes in the
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Mitchell Action as follows (i) Breach of Fiduciary Duty/Unjust Enrichment Subclass: all
individuals who obtained Refund Anticipation Loans from June 13, 1993 through December 31, 1996
through any “H&R Block” office in Alabama for which the Settling Defendants herein received a
license fee payment or portion of the finance charge; (ii) Breach of Contract Subclass: all
individuals who obtained Refund Anticipation Loans from June 13, 1989 through December 31, 1996
through any “H&R Block” office in Alabama for which the Settling Defendants herein received a
license fee payment or portion of the finance charge. A copy of the class certification order is
attached as Exhibit B. The Mitchell Action has not been set for trial. A class certification ruling
is on appeal.
4. On July 14, 1997, a class action was filed in the Circuit Court of Baltimore
City, Maryland against some of the Settling Defendants captioned as Green v. H&R Block, Inc. et
al., Case No. 97195023/CC411 (Circuit Court of Baltimore City, Maryland) (the “Green Action”). The
plaintiff alleges that certain of the Settling Defendants herein violated the Maryland Consumer
Protection Act, engaged in fraudulent concealment and negligent misrepresentations, and breached
fiduciary duties and duties of good faith and fair dealing allegedly owed to plaintiff by offering
RALs. On May 19, 2000, the Court appointed Joyce A. Green as class representative. The Court
appointed Charles J. Piven of Baltimore, Maryland; Steve Martino, W. Lloyd Copeland of Taylor,
Martino & Hedge, PC; Michael B. Hyman of Much, Shelist, Freed, Denenberg, Ament & Rubenstein;
Steven E. Angstreich of Levy, Angstreich, Finney, Baldante, Rubenstein and Coren, P.C.; and Roger
Kirby of Kirby, McInerney & Squire as class counsel in the Green Action. Through the original
order, and an order modifying the class definition on July 10, 2002, the Court certified a class of
all persons whose income taxes were prepared at any “H&R Block” office or facility in Maryland who
obtained a RAL at any time from January 1,
3
1992 to December 31, 1996, and did not later apply for and receive a RAL through an
application that contained a retroactive arbitration clause. A copy of the class certification
order, and the order modifying it, are attached, collectively, as Exhibit C. The Green Action has
been set for trial in May 2006.
5. On March 19, 2004, a class action was filed in the Court of Common Pleas for
Summit County, Ohio against some of the Settling Defendants captioned as Becker v. H&R Block, Inc.,
Case No. 5:04-cv-01074-CAB (N.D. Ohio) (removed from Summit County (Ohio) Court of Common Pleas)
(the “Becker Action”). Plaintiff Lynn Becker alleges that some of the Settling Defendants herein
violated the Ohio credit services organization statute and the Ohio Consumer Protection Act. The
plaintiff purports to represent a class of Ohio residents who, from March 19, 2000 to present,
obtained a RAL through any “H&R Block” office in Ohio. Plaintiff’s Motion to Remand, and
Defendants’ motion to dismiss and Defendants’ motion to compel arbitration, are pending and
unresolved as of the date of this Agreement.
6. The cases identified in paragraphs 2 through 5 will be referred to in this
Agreement collectively as “the Settling Cases.” The plaintiffs in the Settling Cases will be
referred to collectively as “Plaintiffs.”
7. This Settlement Agreement encompasses four distinct Settlement Classes. To
simplify settlement administration and obtain economies of scale the parties negotiated uniform
elements of settlement which apply to all of the Settlement Classes, as well as class specific
elements.
8. The parties have consolidated these uniform and class specific elements within
this Settlement Agreement. Plaintiffs will similarly submit consolidated filings upon application
for preliminary and final approval.
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9. Plaintiffs will jointly move for leave to file a Consolidated and Amended
Complaint in the Circuit Court of Kanawha County, West Virginia, with such request for leave to
file being expressly conditioned upon the concurrent entry of an order granting preliminary
approval of this Agreement (the “Preliminary Approval Order” described below in Section X), which
order will provide that in the event that the Circuit Court determines not to grant final approval
of this Agreement or of any respective settlement class it contains, such Consolidated and Amended
Complaint or affected portion thereof will be stricken (i) concurrently with any order rejecting
approval of this Agreement or of any respective settlement class it contains, or (ii) in the event
that the Circuit Court grants final approval of this Agreement or of any respective settlement
class it contains but such final approval order is subsequently reversed or modified on appeal,
concurrently with any order remanding the case to the Circuit Court, in either case without the
need for any further order of the Circuit Court. This Agreement will be presented for preliminary
review and approval in the Circuit Court simultaneously with the request for leave to file the
proposed Consolidated and Amended Complaint. The Settling Defendants consent to the filing of the
proposed Consolidated and Amended Complaint subject to all applicable conditions herein, including
the striking thereof or any affected portion thereof in the event that the Settlement does not
become final with respect to any settlement class for any reason.
10. With respect to Settling Cases pending in other courts, the parties to those
respective cases will inform their respective courts of the existence of this Agreement and hereby
consent to the respective courts either placing the cases on the inactive docket, staying discovery
or otherwise taking whatever action such courts find best serves the efficient administration of
justice while this proposed settlement is being reviewed for approval.
11. Over the past several years, Class Counsel have conducted an investigation of the
5
facts, including reviews of over 300,000 of the Settling Defendants’ relevant documents and
more than 50 depositions of the Settling Defendants’ representatives, and analyzed the relevant
legal issues. While Plaintiffs and Class Counsel believe that the claims asserted in their
respective complaints have merit, they have also examined the benefits to be obtained under the
proposed settlement and have considered the costs, risks and delays associated with the continued
prosecution of this time-consuming litigation and the likely appeals of any rulings in favor of
either Plaintiffs or the Settling Defendants. Plaintiffs desire to resolve the claims asserted
against the Settling Defendants.
12. Plaintiffs and their Class Counsel believe that, in consideration of all the
circumstances and after prolonged and serious arms-length settlement negotiations with counsel for
the Settling Defendants, the proposed settlement embodied in this Agreement is fair, reasonable,
adequate and in the best interests of the Settlement Class.
13. The Settling Defendants have vigorously denied, and continue to deny, all
liability with respect to any and all of the facts or claims alleged in the complaints filed in the
Cummins, Mitchell, Green and Becker actions, deny that they engaged in any wrongdoing, deny that
they acted improperly in any way, and deny any liability to Plaintiffs, any member of the
Settlement Class, or any third party. The Settling Defendants nevertheless desire to settle
Plaintiffs’ claims on the terms and conditions set forth in this Agreement solely for the purpose
of avoiding the burden, expense, risk and uncertainty of continuing the proceedings in currently
pending actions, and for the purpose of putting to rest all controversies among the Parties. In no
event is this Agreement to be construed as, or is to be deemed evidence of, an admission
or concession on the part of the Settling Defendants or Released Parties (as defined herein)
with respect to: any claim by Plaintiffs and the Settlement Class; any fault, liability, wrongdoing
or
6
damage; the merits of any defenses that the Settling Defendants asserted; or the propriety of
class certification of the Settlement Class if the Action were to be litigated rather than settled.
14. Mediation in the Cummins action was initially unsuccessful in February 2004. In
the Summer of 2005, Class Counsel began to explore the possibility of further mediation.
Thereafter, Class Counsel and counsel for the Settling Defendants commenced formal settlement
negotiations on August 15, 2005, that took place in face-to-face mediation sessions with Thomas
Meites, a mediator suggested to the Parties by United States District Judge Elaine Bucklo, the
presiding judge in Carnegie v. Household International et al., 98 C 2178 (N.D. Ill.) (the “Carnegie
Action”), a separate case not affected by this proposed Agreement, with mediation sessions
conducted on August 15, 16, 29 and September 8, 2005. The Parties thereafter conducted extensive
arms’-length negotiations in numerous negotiation sessions.
15. The Parties intend that the proposed settlement embodied in this Agreement
resolve all the claims and disputes between Plaintiffs, Settlement Class Members, the Settling
Defendants, and all Released Parties with respect to the Released Claims.
II. DEFINITIONS
In addition to the terms defined elsewhere in this Agreement, for purposes of this
Agreement and all its Appendices or Exhibits, the following terms shall have the meanings as set
forth below.
1. “Administration” or “Administration Costs” means the act of, and the costs
associated with, administering the settlement, including but not limited to maintaining an e-filing
process for claims of class members, processing paper claims forms, responding to class member
inquiries, dealing with disputes from class members, distributing checks to class members,
preparing and disseminating reports to class counsel about administrative issues, and post-
7
distribution settlement administration and related activities. Administration Costs do not
include Notice Costs.
2. “Administrator” means the third party administrator to be hired by the Parties
through competitive bidding to handle all or parts of Notice and Administration.
3. “Affiliates” means (i) all past, present or future persons or entities of any
kind controlling, controlled by, or under common ownership with any of the Settling Defendants and
their respective predecessors and successors, including without limitation any parent companies,
subsidiaries, sister companies, or divisions, and (ii) any and all persons or entities acting on
behalf of or at the direction of any of the foregoing, including but not limited to any franchisee
of any Settling Defendant.
4. “Class Counsel” means and includes the following:
Steven E. Angstreich, Esq. |
||
Michael Coren, Esq. |
||
Carolyn C. Lindheim, Esq.
|
Daniel Hume, Esq. | |
Levy Angstreich Finney Baldante
|
Kirby Mclnerney & Squire. LLP | |
Rubenstein & Coren, P.C.
|
830 Third Avenue, 10th Floor | |
1616 Walnut Street, 5th Floor
|
New York, NY 10022 | |
Philade lphia, PA 19103
|
Fax: 212-751-2540 | |
Fax: 215-545-2642
|
Counsel to the State Law Class | |
Counsel to the Green/Mitchell Class |
||
Ronald L. Futterman, Esq.
|
Michael B. Hyman, Esq. | |
Michael I. Behn, Esq.
|
William H. London, Esq. | |
William W. Thomas, Esq.
|
Much Shelist Freed Denenberg | |
Futterman & Howard, Chtd.
|
Ament & Rubenstein, P.C. | |
122 South Michigan Avenue-Suite 1850
|
191 North Wacker, Suite 1800 | |
Chicago, IL 60603
|
Chicago, IL 60606 | |
Fax: 312-427-1850
|
Fax: 312-521-2100 | |
Counsel to the State Law Class
|
Counsel to the State Law Class | |
Brian A. Glasser, Esq.
|
Steven A. Martino, Esq. | |
H. F. Salsbery, Esq.
|
Frederick T. Kuykendall, III, Esq. | |
John Barrett, Esq.
|
W. Lloyd Copeland, Esq. | |
Eric Snyder, Esq.
|
Taylor, Martino & Kuykendall | |
Bailey & Glasser, LLP
|
51 St. Joseph Street |
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227 Capitol Street
|
Mobile, AL 36602 | |
Charleston, West Virginia 25301
|
Fax: 251-405-5080 | |
Fax: 304-342-1110
|
Counsel to the Green/Mitchell Class | |
Counsel to the West Virginia Class |
||
and Coordinating Counsel |
||
John Roddy, Esq.
|
Ronald Frederick, Esq. | |
Gary Klein, Esq.
|
Ronald Frederick & Associates, LLC | |
Elizabeth Ryan, Esq.
|
55 Public Square, Suite 1300 | |
Roddy Klein & Ryan
|
Cleveland, Ohio 44113 | |
727 Atlantic Avenue, 2nd Floor
|
Counsel to the Becker Class | |
Boston, Massachusetts 02111
|
Fax: 216-781-1749 | |
Fax: 617-357-5030 |
||
Counsel to the Becker Class |
||
Charles J. Piven, Esq. |
||
Law Offices of Charles J. Piven, P.A. |
||
The World Trade Center — Baltimore |
||
401 East Pratt Street, Suite 2525 |
||
Baltimore, Maryland 21202 |
||
Fax: 410-685-1300 |
||
Counsel to the Green/Mitchell Class |
5. “Coordinating Counsel” means Brian Glasser and Bailey & Glasser, LLP.
6. The “Effective Date” for purposes of the Settlement shall be five (5) business
days after the latest of the following dates: (a) the date upon which the time to commence an
appeal of the Final Order has expired, if no one has commenced any appeal or writ proceeding
challenging the Final Order; or (b) the date the Final Order has been affirmed on appeal or writ
review (or the appeal or writ petition has been dismissed), and the time within which to seek
further review has expired. Notwithstanding the foregoing, the Settling Defendants may, within
their sole discretion, declare an earlier Effective Date, namely, any date after the Final Order is
entered.
7. “Excluded Claims” means, collectively, (i) all claims, including claims made pursuant to
authorizations to amend the operative complaints, asserted in Marshall v. H&R Block, Inc., No.
02-L-04 (Circuit Court for the Third Judicial Circuit, Madison County, Illinois)
9
and Soliz v. H&R Block, Inc., Cause No. 03-032-D (District Court for Kleberg County, Texas)
arising from or related to the Settling Defendants’ “Peace of Mind” product; (ii) all claims,
including claims made pursuant to authorizations to amend the operative complaints, asserted in
Marshall v. H&R Block, Inc., No. 03-L-576 (Circuit Court for the Third Judicial Circuit, Madison
County, Illinois); McNulty et al. v. H&R Block, Inc, No. 2002 CV 4654 (Court of Common Pleas,
Lackawanna County, Pennsylvania); and Soliz v. H&R Block, Inc., Cause No. 03-199-D (District Court
for Kleberg County, Texas) arising from or related to electronic filing fees; (iii) all claims for
RICO violations or breach of contract asserted by members of the class pending and certified for
merits trial in Carnegie v. Household International et al., 98 C 2178 (N.D. Ill.) (the “Carnegie
Action”) as of the Effective Date, including such RICO and breach of contract claims of persons who
are also members of the classes certified in the Green Action and the Mitchell Action; (iv) all
individual claims of Lynne Carnegie currently pending in Carnegie v. H&R Block, Inc., 96/606129
(Supreme Court of the State of New York, County of New York) as of the Effective Date; (v) all
claims pending in Basile v. H&R Block, Inc., Case No. 93043245 (Court of Common Pleas for
Philadelphia County) as of the Effective Date; (vi) claims under state law based solely on
allegations that a tax preparer failed (A) to properly prepare a tax return or (B) to maintain the
confidentiality of taxpayer information resulting in injury based on “stolen identity” or similar
misuse of taxpayer information or theft of a RAL check; and (vii) any and all claims to enforce the
terms and conditions of this Agreement.
8. “Final Order” means the Final Order of Judgment and Dismissal to be entered if the
Circuit Court grants final approval to this settlement as proposed on behalf of one or more of the
Settlement Classes, substantially in the form of Exhibit D.
9. “Notice” means the notice to the members of the respective Settlement Classes,
10
approved by the Court in the Preliminary Approval Order.
10. “Notice Costs” means the entire cost of providing the notice to all such
Settlement Class Members, including the Cummins Settlement Class, ordered by the Court for mail and
publication
substantially conforming to the proposed notice plan set forth in Section X, Paragraph 3.
Notice Costs further includes all the costs associated with compiling the database of members of
the Settlement Classes, preparing the database of members of the Settlement Classes, printing the
mailed notice, printing the claims forms, mailing the notice and claims form by means of first
class mail, and the cost of developing and maintaining a central website containing materials about
the Settlement Agreement. This cost will be borne by the Settling Defendants. The database to be
utilized for purposes of the initial mailing of notice will be the database previously updated as
of August 2005 by Analytics, Inc.
11. “Preliminary Approval Order” means the order to be entered if the Circuit Court
grants preliminary approval of this Agreement and certifies the Settlement Classes for settlement
purposes only, substantially in the form attached as Exhibit E.
12. “RAL” is a Refund Anticipation Loan.
13. “Released Claims” includes any claims, Unknown Claims as defined herein, rights,
demands, obligations, actions, causes of action, suits, cross-claims, matters, issues, liens,
contracts, liabilities, agreements, costs, expenses of any nature by the Plaintiffs and Settlement
Class Members against the Released Parties arising out of, or in connection with, or in any way
related to any RAL transaction. This includes any activity engaged in or any services performed
directly or indirectly in connection with any RAL, including but not limited to tax preparation,
electronic filing, RAL document preparation or related services, RAL contractual commitments, RAL
advertisements or RAL solicitations, money collected in connection with a RAL, RAL
11
related fees, RAL license fees, RAL participation interest revenue, and the RAL waiver fee, or
other policies or procedures relating to any RAL made within the Settlement Class Period, whether
for damages, fines, punitive damages, exemplary damages, penalties, restitution, disgorgement, or
any declaratory, injunctive or any other equitable relief of any kind, whether based on any federal
or state statute, regulation or common law theory (specifically including but not limited to claims
for fraudulent misrepresentation or omission, state consumer protection or fraud laws, TILA, RICO,
credit service organization statutes, breach of fiduciary duty, agency, loan broker, unjust
enrichment and/or breach of contract). Notwithstanding the
foregoing, “Released Claims” specifically excludes the “Excluded Claims” described in Section II,
paragraph 7.
14. “Released Parties” means, collectively, H&R Block, Inc., H&R Block Services, Inc.,
H&R Block Tax Services, Inc., Block Financial Corp., HRB Royalty, Inc., H&R Block Eastern
Enterprise, Inc., successor to H&R Block Eastern Tax Services, Inc., all direct or indirect
franchise or sub-franchise offices operating under the trade name of “H&R Block,” and (a) any and
all of their respective past and present parent companies, subsidiaries, divisions, affiliates,
franchises, predecessors, successors, and assigns; (b) their respective present and former general
partners, limited partners, principals, members, directors and their attorneys, officers,
employees, stockholders, owners, agents, insurers, reinsurers, attorneys, the representatives,
heirs, executors, personal representatives, administrators, trustees, transferees and assigns of
any of them; and (c) all persons or entities acting on behalf or at the direction of any of the
foregoing. “Released Parties” shall be deemed to include Melanie Lester, Jason Brown, Bobby Hague,
Robert Heckert, Cynthia Lantz, Clarence E. Miller, Carla R. Lewis, and Debra Riggleman, who were
named defendants in the Cummins Action, regardless of whether they are named in the Consolidated
12
and Amended Complaint.
15. The “Settlement Class” or “Settlement Classes” as the context may require, includes
the following classes:
(a) State Law Class: All residents of the several jurisdictions identified in
the chart attached as Exhibit F who applied for and obtained a RAL through any medium, by any name,
advertised, marketed, offered or made by or through any lender through any office operating under
the trade name of “H&R Block” (including franchise or sub-franchise offices of any Settling
Defendant or Affiliate, as defined herein, or any H&R Block offices such as in Sears stores) from
January 1, 2000 through the date of this Agreement;
(b) West Virginia Class: All West Virginia residents who applied for and
obtained a RAL through any medium, by any name, advertised, marketed, offered or made by or through
any lender through any office operating under the trade name of “H&R Block” (including franchise or
sub-franchise
offices of any Settling Defendant or Affiliate, as defined herein, or any H&R Block offices
such as in Sears stores) from January 1, 1994 through the date of this Agreement .
(c) Becker Class: All Ohio residents who applied for and obtained a RAL through any
medium, by any name, advertised, marketed, offered or made by or through any lender through any
office operating under the trade name of “H&R Block” (including franchise or sub-franchise offices
of any Settling Defendant or Affiliate, as defined herein, or any H&R Block offices such as in
Sears stores) from January 1, 2000 through the date of this Agreement.
(d) Mitchell/Green Class: All Maryland residents who applied for and obtained a RAL at
any H&R Block office in Maryland from January 1, 1992 through December 31, 1996 and did not
thereafter apply for and obtain a RAL subject to an arbitration provision
13
and all individuals who obtained a RAL from June 13, 1989 through December 31, 1996 through
any “H&R Block” office in Alabama for which the Settling Defendants herein received a license fee
payment or portion of the finance charge.
(e) Excluded from the Settlement Class are current or former directors or officers of
the Settling Defendants and their counsel.
16. “Settlement Class Members” or “Members of the Settlement Classes” as the context
may require, means all persons who are included in the class definitions in Paragraph 14, above,
and who do not validly and timely elect exclusion from the Settlement Class pursuant to W. Va. R.
Civ. P. 23 and under the conditions and procedures as determined by the Court.
17. “Settlement Class Period” means the time periods associated with each Settlement
Class.
18. “Unknown Claims” means all claims arising out of facts relating to any matter
covered by the Released Claims, which in the future are or may be found to be other than or
different from the facts now believed to be true, so that each person or entity so affected shall
be deemed to have expressly waived all of the rights and benefits of any provision of the law,
either state or federal, providing that a general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have materially affected his
settlement with the debtor, including without limitation § 1542 of the California Civil Code, which
reads as follows:
Section 1542. General Release: extent. A general release does not extend to
claims which the creditor does not know or suspect to exist in his favor at the time
of executing the release, which if known by him must have materially affected his
settlement with the debtor.
All persons or entities providing releases under this Agreement, including all Settlement
Class
14
Members, upon the Effective Date shall be deemed to have, and by operation of the Final Order
shall have, waived any and all provisions, rights or benefits conferred by § 1542 of the California
Civil Code or any comparable law of any state or territory of the United States, or principle of
common law, which is similar, comparable or equivalent to § 1542 of the California Civil Code. All
persons or entities providing releases under this Agreement may hereafter discover facts other than
or different from those which he, she or it now knows or believes to be true with respect to the
subject matter of the Released Claims, but such person or entity, upon the Effective Date, shall be
deemed to have, and by operation of the Final Order in the Action shall have, fully, finally, and
forever settled and released any and all such claims, known or unknown, suspected or unsuspected,
contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore
have existed upon any theory of law or equity now existing or coming into existence in the future,
including conduct which is negligent, intentional, with or without malice, or a breach of any duty,
law or rule, without regard to the subsequent discovery or existence of such different or
additional facts.
III. CERTIFICATION OF CLASS FOR SETTLEMENT PURPOSES ONLY
For settlement purposes only, the Parties agree that, as part of the preliminary approval
process, the Court may make preliminary findings and enter an order granting provisional
certification of the respective Settlement Classes subject to final findings and certification in
the Final Order, and appointing both Plaintiffs and Class Counsel as representatives of the
proposed Settlement Classes. For settlement purposes only, the respective Settlement Classes are
certified pursuant to Rule 23(b)(3) of the West Virginia Rules of Civil Procedure. The Settling
Defendants do not consent to certification of the respective
Settlement Classes, or to the filing of the proposed Consolidated and Amended Complaint, for
any purpose other than to effectuate the
15
settlement of the actions and claims identified in this Agreement. If one or more of the
Settlement Classes contained in this Agreement is not approved by the Court or is terminated
pursuant to its terms or for any other reason, or is disapproved in a final order by any court of
competent jurisdiction, (a) the order certifying the disapproved Settlement Class and all
preliminary and/or final findings or stipulations regarding certification of such disapproved
Settlement Class shall be automatically vacated upon notice to the Court of that portion of this
Agreement’s termination or disapproval and in such instance, the disapproved Settlement Class shall
proceed as indicated: (i) the Cummins Action may proceed with the West Virginia merits class
previously certified by the Court as of December 30, 2004, and as though the Settlement Class had
never been certified and any related findings or stipulations pursuant to this agreement had never
been made; or (ii) the Mitchell Action may proceed with the merits class previously certified by
the court as of July 11, 2003, including the appeal of class certification, and as though the
Settlement Class had never been certified and any related findings or stipulations had never been
made; or (iii) the Green Action may proceed with the merits class previously certified by the court
as of May 19, 2000, and as though the Settlement Class had never been certified and any related
findings or stipulations had never been made; and (b) the Plaintiffs will withdraw their motion for
leave to file the proposed Consolidated and Amended Complaint in its present form and, if already
filed, portions of the Consolidated and Amended Complaint related to the disapproved Settlement
Class will be stricken pursuant to the terms of the order related to its filing; and (c) the
Parties reserve all procedural or substantive rights as presently exist, including all affirmative
defenses, in all RAL litigation pending as of the date of execution of this Agreement, including
but not limited to, the Becker Action and Basile v. H&R Block, No. 9304-3246 (Court of Common Pleas
for Philadelphia County, Pennsylvania).
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IV. SETTLEMENT CONSIDERATION
1. ECONOMIC RELIEF.
(a) The Settling Defendants will contribute up to $62.5 million in cash, by wire
transfer, to be used for purposes of making payments to Settlement Class Members (the “Settlement
Fund”), paying for all attorneys’ fees and costs to Class Counsel, and covering service awards to
representative Plaintiffs. This is substantially an “all-in” payment.
(b) The Settlement Fund will be held in one account, the interest on which account
will accrue first to the benefit of the Settlement Fund. The account will be held at a major bank
agreed to by the Coordinating Counsel and Counsel for the Settling Defendants and approved by the
Court and shall be under the joint control of the Settling Defendants and Coordinating Counsel.
(c) The Settling Defendants will not be required to make any additional payments to
or on behalf of the Settlement Class Members for any purpose whatsoever, except for the Notice
Costs substantially conforming to the proposed notice plan set forth in Section X, Paragraph 3,
which shall be paid separately by the Settling Defendants.
(d) Each Settlement Class Member who submits a timely, proper and undisputed Claim
Form as defined in Section XII, Paragraph 1 (a “Valid Claim”) will be entitled to a payment from
the Settlement Fund for each RAL that he or she obtained by or through the Settling Defendants or
their Affiliates for their claim. As provided in Section IV, Paragraph 1(g), the amount paid to
individual Settlement Class Members will be calculated on a pro-rata basis (based on each
Settlement Class Member’s total claim for all RALs previously obtained during the respective
Settlement Class Member’s Settlement Class Period) from the cash funds remaining in the Settlement
Fund after deduction for all items to be paid for from the Settlement
17
Fund under this Agreement, including Administration Costs, service fees, and attorneys’ fees
and costs awarded to Class Counsel. Notwithstanding the foregoing, if a Settlement Class Member has
previously released his or her claims for any RAL or RALs covered by any prior individual or class
settlement with
any of the Settling Defendants, such person cannot recover any further cash payment from the
Settlement Fund with respect to such settled RAL or RALs under the terms of this Paragraph, but he
or she will still be entitled to receive payments under the terms of this Paragraph solely with
respect to any other non-settled RALs he or she may have obtained, on the same terms and conditions
as applicable to other Settlement Class Members.
(e) In the event that a RAL was issued to joint borrowers and a Valid Claim is
submitted with respect to such RAL, such couple or joint interest shall be treated as one
Settlement Class Member for all purposes under this Agreement; provided, however, that if the joint
borrowers are contesting the entitlement of the other to the settlement consideration, each joint
borrower will be entitled to one half of the settlement consideration with respect to such RAL.
Settlement Class Members who are joint RAL borrowers waive any and all claims against the
Settlement Administrator and the Released Parties with regard to payments made to joint RAL
borrowers.
(f) The Settling Defendants will contribute the amount required to the Settlement
Fund no later than 31 days after the Court’s entry of the Final Order, or the Effective Date,
whichever occurs first. No payments will be made to or on behalf of the Settlement Class Members
until at least 60 days after the Effective Date. In the event that the settlement does not become
final and the Effective Date does not occur for any reason, this amount, together with all accrued
interest, shall promptly be returned to the Settling Defendants by either transfer of the ownership
of the account or wire transfer.
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(g) The Settlement Fund shall be distributed to class members as follows: (i)
$32.5 million of the Settlement Fund shall be paid as attorneys’ fees and costs to Class Counsel in
the West Virginia Cummins Class, service awards to representative Plaintiffs in the West Virginia
Cummins Class, pro rata Administration Costs of the Settlement Fund attributable to the West
Virginia Class, and further consideration to members of the West Virginia Class not to exceed $175
per RAL (after attorneys’ fees and expenses and Administration Costs attributable to West Virginia)
on a pro rata basis; and (ii) a total of up to $30 million of the Settlement Fund shall be paid to
members of the other classes in this action as
attorneys’ fees and costs for their Class Counsel, service awards to representative Plaintiffs
in such other classes, pro rata Administration Costs of the Settlement Fund attributable to these
other classes, and further consideration on a pro rata basis to such other class members in the
amounts outlined on the chart attached as Exhibit F. A class member’s right to a settlement payment
pursuant to this Agreement is a conditional right that terminates if a class member to whom the
Administrator mailed a settlement payment fails to cash his or her check within six months of its
mailing date. In such case the check shall be null and void (the checks shall be stamped or printed
with a legend to that effect) and the Administrator and the Parties shall have no further
obligation under the terms of this Agreement to make payment to such class member, with such amount
reverting to the Settlement Fund effective immediately upon the expiration of such six-month
period. The Administrator will provide to Coordinating Counsel and counsel for the Settling
Defendants and Coordinating Counsel will file with the Court a final accounting of the Settlement
Funds within 30 days after the latest date upon which class members’ checks expire.
(h) In the event that there are any residual amounts that remain in the Settlement
Fund after the Effective Date and distribution pursuant to the terms of this
19
Agreement, the remaining amounts in the Settlement Fund shall be distributed to a charity or
charities or scientific or educational organizations pursuant to Section 501(c)(3) of the Internal
Revenue Code jointly proposed by the Plaintiffs and Settling Defendants and approved by the Court.
The Plaintiffs and Settling Defendants propose the West Virginia University College of Law. If that
proposal is disapproved and the parties are unable to reach agreement on another proposed charity,
then the Court shall designate a charitable organization to which the remaining amounts of the
Settlement Fund shall be distributed.
V. REPRESENTATIONS, WARRANTIES AND CONFIRMATORY DISCOVERY
1. Settling Defendants represent and warrant that, to the best of their knowledge
and based in reliance on data obtained from Analytics Inc. and the RAL lenders, no more than
15,700,000 RALs are attributable to members of the Settlement Class (excluding only the RALs
attributable to the West Virginia Class). Should confirmatory discovery or other information prove
the stated number of RALs inaccurate,
Settling Defendants shall increase the Settlement Fund by a proportional amount equal to the
ratio between the total number of RALs and 15,700,000.
2. Settling Defendants further represent and warrant that, to the best of their
knowledge and based in reliance on data obtained from Analytics Inc. and the RAL lenders, no more
than 1,585,000 RALs are attributable to members of the Becker Class. Should confirmatory discovery
or other information prove the stated number of RALs inaccurate, Settling Defendants shall increase
the Settlement Fund attributable to the Becker Class by a proportional amount equal to the ratio
between the total number of RALs in Ohio and 1,585,000.
3. Settling Defendants further represent and warrant that, to the best of their
knowledge and based in reliance on data obtained from Analytics Inc. and the RAL lenders, no
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more than 560,000 RALs are attributable to members of the Mitchell/Green Class. Should
confirmatory discovery or other information prove the stated number of RALs inaccurate, Settling
Defendants shall increase the Settlement Fund attributable to the Mitchell/Green Class by a
proportional amount equal to the ratio between the total number of RALs in the Mitchell and Green
cases and 560,000.
4. Prior to the date set for the preliminary approval hearing, the Settling
Defendants provided Class Counsel with a summary of the number of Settlement Class members in each
jurisdiction covered by this Agreement and the number of RALs within each such jurisdiction
obtained within the applicable class period. Prior to mailing any notice, Settling Defendants will
provide to Class Counsel an affirmation that the database has been checked against the National
Change of Address (NCOA) database.
5. Settling Defendants represent and warrant that (i) all “Peace of Mind” related
cases involving a class allegation with which they have been served or of which they are aware as
of the date of this Agreement, and (ii) all electronic filing related cases involving a class
allegation with which they have been served or of which they are aware as of the date of this
Agreement have been excluded from this Agreement, by name, in the definition of Excluded Claims.
6. Settling Defendants represent and warrant that all RAL-related cases involving a
class allegation with which they have been served or of which they are aware as of the date of this
Agreement
are either specifically identified in the Agreement and thereby proposed for settlement or
specifically excluded from this Agreement, by name, in the definition of Excluded Claims.
7. Subsequent to preliminary approval of this settlement, Coordinating Counsel may
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conduct confirmatory discovery sufficient to assure that (1) the Settling Defendants’
representations and warranties that the Settlement Class encompasses a maximum of 15,700,000 RALs
are accurate; (2) the Settling Defendants’ representations and warranties that the Becker Class
encompasses a maximum of 1,585,000 RALs are accurate; (3) the Settling Defendants’ representations
and warranties that the Mitchell/Green Class encompasses a maximum of 560,000 RALs are accurate and
(4) Class Members have been properly identified. Coordinating counsel will accept affidavits as to
these subjects, and will conduct depositions only if the affidavits are insufficient and Settling
Defendants are unwilling or unable to supplement such affidavits to address deficiencies identified
by Coordinating Counsel. If a deposition(s) is conducted, Settling Defendants will produce a
knowledgeable person with respect to the three topics described above.
VI. BUSINESS PRACTICES
1. Subject to the terms of this Agreement and all applicable state or federal law,
for the period from the date of this Agreement until two years following the date of entry of a
Final Order, (the “Time Period”) in connection with any RAL transaction, the Settling Defendants
and/or their Affiliates shall (a) substantially conform to the business practices set forth in
Appendix A to this Agreement, and (b) use RAL applications, agreements and other RAL forms in
substantially the form attached as Appendix B (the “RAL Forms”). So long as any of the Settling
Defendants and/or their Affiliates do not knowingly and materially fail to conform to such business
practices or use such RAL Forms during such Time Period, Plaintiffs and all Settlement Class
Members agree to release any Released Claims or other claims or actions for money damages or
equitable relief that they may have or be entitled to assert hereafter against such entities under
any legal theory concerning such business practices or RAL Forms either
22
directly, representatively, derivatively, or in any other capacity, in any local, state, or
federal court, or in any agency or authority or forum wherever located arising out of or related to
any new RAL transaction in such Time Period. However, if at the end of this Time Period the
Settling Defendants or their Affiliates (as applicable) have not registered as a Credit Service
Organization (a “CSO”) in a jurisdiction covered by this Agreement that requires or permits
registration as a CSO (or posted a bond in a state that requires or permits a bond) for persons who
assist consumers in obtaining an extension of credit under an applicable CSO statute, and have not
implemented the requirements of such CSO statute, (i) the release set forth in the immediately
preceding sentence by Members of the Settlement Class who reside in such jurisdiction shall be
deemed null and void in such jurisdiction, (ii) all Parties will be placed in their status quo ante
position with respect to any such new RAL transactions in such jurisdiction in such Time Period,
(iii) Settlement Class Members in such jurisdiction shall have all the all procedural or
substantive rights that they would otherwise have as of the day after the Effective Date of this
Agreement (and in addition shall be entitled to tolling of any applicable limitations period for
such Time Period), and (iv) the Settling Defendants will likewise have all the procedural or
substantive rights and defenses that they would otherwise have as of the day after the Effective
Date of this Agreement.
2. Subject to the terms of this Agreement, the Settling Defendants and/or their
Affiliates will begin implementation of the business practices set forth in Appendix A immediately
following the Effective Date. The Parties acknowledge that the RAL Forms are documents of the RAL
lender, and believe that the RAL Forms attached as Appendix B are reasonably acceptable to the RAL
lender and that the RAL lender will approve of their use, in which case the Settling Defendants
and/or their Affiliates will also begin implementation of the
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use of the RAL Forms immediately following the Effective Date. However, if there are changes
in the applicable state or federal laws after the Effective Date and within the Time Period that
impact the business practices in Appendix A or the RAL Forms, or if the RAL lender within the Time
Period gives notice of a refusal to agree to the implementation and use of RAL Forms that
substantially conform to the
requirements of Paragraph (a) in all material respects, Coordinating Counsel for the Settlement
Class and the Settling Defendants agree to use their best efforts to negotiate together in good
faith to develop new business practices or, in the case of the RAL Forms, with the RAL lender to
develop revised RAL Forms, that in either case conform to the requirements of Paragraph (a) to the
extent reasonably practicable. In the event that Coordinating Counsel and the Settling Defendants
are not able to reach agreement with the RAL lender on revisions to the RAL Forms despite their
best good faith efforts, then (i) Coordinating Counsel and the Settling Defendants will use their
best efforts to determine how the revised disclosures that may be required can be conveyed to RAL
customers by means other than the RAL Forms used by the RAL lender (to the extent consistent with
the Settling Defendants’ contractual obligations with the RAL lender), and (ii) the Settling
Defendants and their Affiliates shall be released from all requirements to use the specific RAL
Forms in Appendix B.
3. Nothing in Paragraph 1 above shall bar a Settlement Class Member who is a RAL
customer from asserting a claim to the extent that one or more of the Settling Defendants or their
Affiliates fail to perform their contractual obligations under the RAL Forms.
4. Nothing in this Section VI forecloses a Non-Opt Out’s right to arbitrate a
Released Claim arising prior to the date of this Agreement pursuant to Section VII, Paragraph 2.
5. Nothing in this Section VI shall be construed as a covenant on the part of the
Settling Defendants or their Affiliates to register as a CSO in any jurisdiction, but it should be
24
construed as an agreement on the part of the Settling Defendants to, in good faith, evaluate
their obligations under various CSO laws and comply with them to the extent applicable. This
Section VI is not an admission that any Settling Defendant or any Affiliate is or was at any time a
CSO. This Section VI is instead an inducement, available at the Settling Defendants’ option, to
register as a CSO. In addition, a decision by any of the Settling Defendants and/or their
Affiliates not to register as a CSO in any particular jurisdiction(s) by the end of the Time Period
set forth in Paragraph (a) above shall not be or be deemed to be a breach of this Agreement or the
violation of any order related to this Agreement and the settlement contemplated herein in any
respect.
6. This Section VI is not intended to create a right or obligation on the part of
any Settlement Class Member to litigate any issue pursuant to this Section VI in the Circuit Court
of Kanawha County, West Virginia, nor is this Section VI intended to have the effect or character
of a Consent Decree. After the Time Period ends, the Settling Defendants have no further obligation
to consult Coordinating Counsel respecting changes to their business practices or RAL Forms. After
the Time Period ends, the release offered by Paragraph (b) will either be effective or not
effective in any given jurisdiction, as determined in the normal fashion by any tribunal of
competent jurisdiction.
VII. RELEASE BY SETTLEMENT CLASS MEMBERS
1. In accordance with the provisions of the Final Order, for good and sufficient
consideration, the receipt of which is hereby acknowledged, upon the Effective Date Plaintiffs and
each Settlement Class Member who receives money from the Settlement Fund shall be deemed to have,
and by operation of the Final Order shall have, fully, finally and forever released, relinquished
and discharged all Released Claims against the Released Parties.
2. Each Settlement Class Member who does not opt out of this settlement (“Non-Opt
25
Outs”), but for whatever reason does not receive money from the Settlement Fund, shall be
deemed to have and by operation of the Final Order shall have fully, finally and forever released
and extinguished his or her right (if any ever existed) to adjudicate a Released Claim in any forum
other than by individual arbitration as permitted by and in accordance with the arbitration
provision of the 2005 RAL application, a copy of which is attached as Exhibit G. In all other
respects, such Non-Opt Outs do not release any Released Claims for a period of one year after the
Effective Date, at which time such Non-Opt Outs shall be deemed to have, and by operation of the
Final Order shall have, fully, finally and forever released, relinquished and discharged all
Released Claims against the Released Parties.
3. In accordance with the provisions of the Final Order, for good and sufficient
consideration, the receipt of which is hereby acknowledged, upon the Effective Date each of the
Released Parties and all signatories to this Agreement shall be deemed to have, and by operation of
the Final Order shall have, fully, finally and forever released, relinquished and discharged
Plaintiffs, Class Counsel, and the
Settling Defendants and their counsel in this Action from any claims (including Unknown
Claims) for abuse of process, libel, malicious prosecution or similar claims arising out of,
relating to, or in connection with the institution, prosecution, defense, assertion, or resolution
of the Action, including any right under any statute or federal law to seek counsel fees and costs.
VIII. EXCLUSIONS FROM AND OBJECTIONS TO SETTLEMENT
1. The “Opt-Out Date” will be a date set by the Court and identified in the Notice
(defined below).
2. Each Settlement Class Member who wishes to be excluded from the Settlement Class
must mail or otherwise deliver to the Administrator an appropriate written request for
26
exclusion, including his or her name, address, telephone number and Social Security number,
that is personally signed by the Settlement Class Member, which request must be postmarked no later
than the Opt-Out Date and actually received by the Administrator. No Settlement Class Member, or
any person acting on behalf of or in concert or in participation with that Settlement Class Member,
may request exclusion of any other Settlement Class Member from the Settlement Class. The original
requests for exclusion shall be filed with the Court by the Administrator not later than 30 days
after the Opt-Out Date. The filing shall redact the social security number of the person requesting
exclusion, except for the last three digits. Copies of requests for exclusion will be provided by
the Administrator to Class Counsel and counsel for the Settling Defendants not later than five days
after the Opt-Out Date. If this Agreement is approved, any and all persons within the Settlement
Class who have not submitted a timely, valid and proper written request for exclusion from the
Settlement Class will be bound by the releases and other terms and conditions set forth herein and
all proceedings, orders and judgments in the Action, even if those persons have previously
initiated or subsequently initiate individual litigation or other proceedings against the Settling
Defendants (or any of them) relating to the claims released pursuant to or covered by the terms of
this Settlement.
3. Any Settlement Class Member who has not filed a timely, valid and proper written
request for exclusion and who wishes to object to the fairness, reasonableness or adequacy of this
Agreement or the settlement, or to any award of attorneys’ fees and expenses, must serve upon
Coordinating Counsel and counsel for the Settling Defendants (by mail, hand or by facsimile
transmission) and must be received by the Court, no later than the Opt-Out Date or as the Court may
otherwise direct, a statement of his/her objection, as well as the specific reason(s), if any, for
each objection, including any legal support the Settlement Class Member
27
wishes to bring to the Court’s attention and a description of any evidence the Settlement
Class Member wishes to introduce in support of the objection. Settlement Class Members may so
object either on their own or through an attorney hired at their own expense who files an
appearance on their behalf.
IX. THE FINAL JUDGMENT AND ORDERS OF DISMISSAL
1. If, after the Final Approval Hearing, the proposed Settlement is approved by the
Court with respect to one or more Settlement Classes, Class Counsel shall promptly file and request
entry of a Final Order, substantially in the form of Exhibit D, by the Court:
(a) Finding that the requirements necessary for certification of the Settlement
Class for purposes of settlement, have been satisfied, approving both the final certification of
the Settlement Class and the Agreement, judging its terms to be fair, reasonable, adequate and in
the best interests of the Settlement Class, directing consummation of its terms, and reserving
continuing jurisdiction to implement, enforce, administer, effectuate, interpret and monitor
compliance with the provisions of the Agreement and the Judgment;
(b) Dismissing the Action and the Released Claims, with prejudice and without costs
(except as otherwise provided herein) against Plaintiffs and all Settlement Class Members, and
releasing both the Released Claims and all of the claims described in Section I, Paragraphs 2
through 5 against the Released Parties; and
(c) Permanently barring and enjoining Plaintiffs and Settlement Class Members from
asserting, commencing, prosecuting or continuing any of the Released Claims or any of the claims
described in Section I, Paragraphs 2 through 5 against the Released Parties, except in a manner
consistent with all terms and conditions of Section VII, Paragraph 2, to the extent applicable.
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2. Within 14 days after the Effective Date, Plaintiffs shall, with appropriate
court approvals, dismiss their claims pending in the Cummins Action, the Mitchell Action, the Green
Action, and the Becker Action.
X. NOTICE AND PRELIMINARY APPROVAL OF SETTLEMENT
1. Class Counsel will submit preliminary approval papers for the settlement,
including a Motion for Preliminary Approval and the proposed Preliminary Approval Order, together
with a proposed form or forms of Notice and a Summary Notice substantially in the form of Exhibit H
(the “Notice” and “Summary Notice”), the proposed form of the Final Order, and the executed
Agreement, within a reasonable time following of execution of this Agreement.
2. Class Counsel will submit to the Court the proposed Preliminary Approval Order
which will, among other things, certify the respective Settlement Classes for settlement
purposes only, approve Plaintiffs as adequate representatives of the respective Settlement
Classes, and ask for a date for a “Final Approval Hearing.” The proposed Preliminary Approval Order
also will approve the form of the Notice, will find that the method of notice selected constitutes
the best notice to all persons within the definitions of the respective Settlement Classes that is
practicable under the circumstances, and will find that the form and method of notice comply fully
with all applicable law.
3. The Parties propose the following Notice regime:
(a) The appropriate form of notice, along with a claim form, will be mailed to the last
known address of all Settlement Class Members, by first class mail, and any mail returned with a
forwarding address will be promptly re-mailed to such address;
(b) The Administrator and each Class Counsel that maintains a website will provide a
link on its website to a central site maintained by the Administrator to obtain
29
downloadable and printable copies of the Settlement Agreement, the Notice and the Claim Form;
(c) Plaintiffs will also provide a short form publication notice of the Agreement
(“Summary Notice”) in the form attached as Exhibit H to be published twice in USA Today.
4. The Settling Defendants will pay the cost of the proposed mailed notice and
publication in Paragraph 3 above. Additional publication notice ordered by the Court, if any, shall
be at the expense of the Settlement Class receiving such additional publication notice.
5. The Settling Defendants and Coordinating Counsel shall, by agreement, designate
an Administrator. The Settling Defendants and Coordinating Counsel agree that they will cooperate
in negotiating the Notice and Administration Costs, toward the end of reducing both costs and
preventing the Administrator from incurring any significant Administration Costs before the
Effective Date.
6. The Administrator will file with the Court and serve upon Class Counsel and
Settling Defendants’ counsel no later than ten (10) days prior to the Final Approval Hearing an
affidavit or declaration stating that notice has been completed in accordance with the terms of the
Preliminary Approval Order.
7. The Final Approval Hearing will be held at a date and time to be set by the
Court after mailing of the notice and the passing of the opt-out date. At the Final Approval
Hearing, the Court will consider and determine whether the provisions of this Agreement should be
approved, whether the Settlement should be finally approved as fair, reasonable and adequate,
whether any objections to the Settlement should be overruled, and whether a Final Order approving
the Settlement and dismissing any of the actions should be entered.
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XI. PAYMENT OF ATTORNEYS’ FEES AND REIMBURSEMENT OF EXPENSES TO CLASS
COUNSEL
1. Plaintiffs’ Coordinating Counsel will submit a fee petition for attorneys’
fees, costs and expenses, on behalf of all Class Counsel, with all such fees and costs to be paid
from the Settlement Fund. In such Petition, Coordinating Counsel will request that the Court award
such attorneys’ fees, costs and expenses to Coordinating Counsel to be distributed in his
discretion thereafter between and among all Class
Counsel. The Settling Defendants agree not to oppose in Court or any other forum such petition
by Coordinating Counsel for an award of attorneys’ fees and expenses to be paid from the Settlement
Fund.
2. Entry of a Final Order is not conditioned upon an award of the attorneys’ fees
and costs sought by Class Counsel.
3. Coordinating Counsel will apply to the Court for an award of service fees for
representative Plaintiffs. All service fees shall be paid out of the aforesaid fees and expenses to
be approved by the Court, in settlement of their individual claims in this action and in any other
pending action involving allegations regarding refund anticipation loans in any state or federal
court against any Settling Defendants or their Affiliates. Representative Plaintiffs will not be
entitled to receive any additional payments in connection with this settlement other than their
service fee and their pro rata payment under the Agreement.
4. The Settling Defendants shall not be liable for any additional fees or expenses
of Plaintiffs or any other plaintiff in any of the actions settled by this Agreement or persons
within the Settlement Class, or other plaintiffs’ counsel in connection with the actions settled by
this Agreement. The Settling Defendants will be entitled to oppose any such fee application.
5. Class Counsel agree that they will not seek any additional fees or costs arising
out of any case settled by this Agreement other than as provided in this Agreement from any of the
Settling Defendants in connection with the settlement of the Settling Cases.
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6. Payment of any Class Counsel fees, expenses and/or service fees for class
representatives approved by the Court shall be made ten (10) days following the Effective Date.
XII. CLAIMS (CLAIMS PROCESS)
1. The Administrator will mail the appropriate claim form with respect to the
relief set forth in Section IV, Paragraph 1 above substantially in the form attached as Exhibit I,
to all persons within the Settlement Class together with the Notice. Pursuant to this Agreement,
certain monetary benefits are available to Settlement Class Members only upon submission to the
Administrator of a Valid Claim. A
“Valid Claim” is a Claim Form that: (1) is signed by the Settlement Class Member, or signed by
the heirs or estate of a deceased Settlement Class Member; (2) provides all the information
required by the Claim Form, including: (i) the Social Security Numbers that they have used at any
time; and (ii) their current mailing address; (3) is postmarked by June 30, 2006; (4) is affirmed
as true by the claimant who shall also state (i) that he/she is the person who applied for and
received a RAL, (ii) the name(s) under which his/her RAL was approved, and (iii) his/her current
name to be stated on any settlement check; and (5) is determined by the Administrator to be
complete and in accordance with the requirements of this Agreement.
2. Promptly after June 30, 2006, the Administrator will provide Coordinating
Counsel and counsel for the Settling Defendants with a list identifying: (1) the number of claim
forms submitted; (2) the number of RALs covered; and (3) the number of claim forms that were denied
(“Denied Claims”).
3. After the Effective Date, Valid Claims will be paid by the Administrator as
ordered by the Court.
32
4. Promptly after receiving a claim form, the Administrator will evaluate the
claim and, for Denied Claims, will mail to the Settlement Class Member, with copies to Coordinating
Counsel and counsel for Settling Defendants, a notice stating that the claim was denied and the
reasons for the denial, and advising the Settlement Class Member how he or she might contest denial
or remedy any deficiency in the filing. For issues that are not administrative in nature, the
Administrator may advise the Settlement Class Member to contact Class Counsel for the person with
any questions about his or her Denied Claim.
5. A Settlement Class Member or Class Counsel may submit to the Administrator a
request to reconsider the claim denial within 45 days following the date of such denial. Such
request must be accompanied by documentation to support the claim and served on Coordinating
Counsel and counsel for the Settling Defendants, and Coordinating Counsel shall promptly refer such
claims to appropriate Class Counsel for the person making the claim.
6. Class Counsel for any claimant and counsel for the Settling Defendants will meet
promptly after the Effective Date to confer regarding all Denied Claims for which requests for
reconsideration have been denied by the Administrator. Class Counsel for the claimant shall have
full settlement authority to resolve such Denied Claims. If counsel for the Parties cannot then
agree as to the treatment of a submitted Claim Form, the matter will be submitted to the Discovery
Commissioner in the Cummins Action (“Discovery Commissioner”) for final and binding determination,
with costs of resolution to be part of Administration Cost. Claims that are to be submitted to the
Discovery Commissioner for resolution will be submitted together in bulk no later than 30 days
after attempts at informal resolution of all Denied Claims have been completed. Should in-person
hearings be required, the Discovery Commissioner shall hold such hearings in the state in which the
respective complaining claimants reside.
33
7. This Section sets forth the exclusive procedure for determining the validity
of claims, and no Settlement Class Member may challenge the denial of any such claim except through
this procedure.
XIII. TERMINATION OF THE AGREEMENT
If this Settlement Agreement, as a whole, or any respective Settlement Class it contains is
not approved by the Court or does not receive final approval after review by any court of competent
jurisdiction for any reason, or is terminated in accordance with its terms for any other reason,
the affected Parties will be returned to their status immediately prior to execution of the
Agreement as if this Agreement had never been made, and (i) the affected Parties will be relieved
from any orders or stipulations made in connection with this Agreement, other than the order
related to the filing of the Consolidated and Amended Complaint and providing that it or the
affected portions related to the disapproved Settlment Class, as appropriate, shall be stricken,
(ii) if and only if the West Virginia Class is disapproved, then the Cummins Action will proceed
with discovery toward trial on the merits with the merits class previously certified by the Court
as of December 30, 2004, as set forth in Section I.2 above; (iii) if and only if the Mitchell/Green
Class is disapproved, then the Mitchell Action will proceed with discovery toward trial on the
merits with the merits class previously certified by the Court as of July 11, 2003, as set forth in
Section I.4 above; (iv) if and only if the Mitchell/Green Class is disapproved, then the Green
Action will proceed toward trial on
the merits with the merits class previously certified by the Court as of May 19, 2000, as set
forth in Section III above; and (v) if and only if the Becker Class is disapproved, then the Becker
action will proceed as directed by the court in Ohio in which it is pending. Accordingly, upon any
such termination for any reason (i) the Parties will be deemed to have preserved all their
substantive or procedural rights or defenses with respect to
34
the Cummins Action, Mitchell Action, Green Action or Becker Action, as appropriate, existing
as of the date of this Agreement and (ii) the Parties shall not be deemed to have waived any
substantive or procedural rights or defenses of any kind that they may have with respect to any
persons within the Settlement Class who were not members of the merits class that was certified in
the Cummins Action as of December 30, 2004, in the Mitchell Action as of July 11, 2003, and in the
Green Action as of May 19, 2000, as appropriate,; provided, that the terms of this Section XIII
shall survive any termination of the settlement or this Agreement and shall remain binding on the
Parties and effective in all respects regardless of the reasons for such termination.
XIV. NO ADMISSION OF LIABILITY
Neither this Agreement nor any drafts hereof nor any documents relating to the Settlement set
forth herein constitutes an admission of liability or of any fact by the Plaintiffs or the Settling
Defendants. The Parties agree that the foregoing documents:
(a) Will not be offered or received against any of the Released Parties as evidence
of or be construed as or deemed to be evidence of, any admission or concession by any of the
Released Parties of (i) the truth or relevance of any fact alleged by Plaintiffs, (ii) the
existence of any class alleged by Plaintiffs, (iii) the propriety of class certification on the
merits if the Cummins Action, the Mitchell Action, the Green Action, or the Becker Action were to
be litigated rather than settled, or (iv) the validity of any claim or the deficiency of any
defense that has been or could have been asserted in the Cummins Action, the Mitchell Action, the
Green Action, or the Becker Action or in any other litigation;
(b) Will not be offered as or received against any of the Released Parties as
evidence of, or construed as or deemed to be evidence of any admission or concession of any
liability, negligence, fault or wrongdoing, or in any way referred to for any other reason as
against any of
35
the parties to this Agreement, in any other civil, criminal or administrative action or
proceeding, other than such proceedings as may be necessary to effectuate the provisions of this
Agreement; provided, however, that if this Agreement is approved by the Court, the Released Parties
may refer to it to effectuate the liability protection granted them hereunder.
(c) Will not be offered or received as an admission or concession that the
consideration to be given to Settlement Class Members hereunder represents the amount which could
be or would have been recovered by any such persons after trial.
XIV. CONTINUING JURISDICTION
1. The Circuit Court of Kanawha County, West Virginia, will have continuing
jurisdiction over the Cummins Action for the purpose of implementing the Settlement until the
Cummins Action and all related matters are fully resolved, and for enforcement of the Settlement,
the Agreement and the Final Order thereafter. Any dispute regarding the Parties’ obligations
pursuant to this Agreement and/or interpretation of the terms of this Agreement or Final Order will
first be presented to the Discovery Commissioner for a recommendation as to how the dispute should
be resolved, and the Court may consider the Discovery Commissioner’s recommendation in ruling on
any dispute requiring the Court’s action. Notwithstanding the foregoing, the procedure set forth in
this Section XII above shall be the exclusive procedure for determining the validity of claims, and
no Settlement Class Member may challenge any claim denial except through the procedure set forth in
Section XII, Paragraphs 5 and 6.
XV. JOINT PRESS RELEASE
1. The Parties will agree upon the form of any public statement to the press
or governmental agencies concerning the settlement, the Agreement and the proceedings leading to
its ultimate approval or disapproval by the Court (whether issued by mail, website posting or
36
other means of communication). The Parties and their counsel shall be entitled to respond to
inquiries by the press or otherwise. but, except as provided in the preceding sentence, shall not
(i) initiate any public announcement, including a press release, or other communications with the
press regarding the Settlement, (ii) make any public comments that would undermine the joint press
release or the Settlement, or (iii) make any disparaging public statements about any other Party or
counsel for a Party prior to the Effective Date. Nothing in this Paragraph shall prohibit Class
Counsel from providing legal advice to individual Settlement Class Members
XVI. MISCELLANEOUS PROVISIONS
1. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding between and among the Parties with respect to settlement, and supersedes any and all
prior negotiations and agreements or understandings (oral or written) with respect to the subject
matter hereof.
2. NEUTRAL INTERPRETATTON. This Agreement shall not be construed more strictly
against one Party than another merely because it may have been prepared by counsel for one of the
Parties, it being recognized that, because of the arms-length negotiations and mediation resulting
in the Agreement, all parties have contributed substantially and materially to the preparation of
the Agreement.
3. CHOICE OF LAW. This Agreement will be governed by federal law and the internal
laws of West Virginia, without regard to its choice of law principles.
4. CHOICE OF FORUM. The forum selected by the Parties for implementation and
enforcement of the Settlement shall be West Virginia, in the Circuit Court of Kanawha County.
5. MODIFICATIONS OR AMENDMENTS. This Agreement may not be modified or amended
except by a writing signed by all Parties and their respective counsel and the
37
subsequent approval of the Court.
6. COUNTERPARTS. This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute one and the same
instrument.
7. ADDITIONAL ACTS TO EFFECTUATE THE AGREEMENT. The Parties shall execute all
documents and perform all acts necessary and proper to effectuate the terms of this Agreement and
to obtain the benefits of the Agreement.
8. COMPETENCY; INDEPENDENT COUNSEL. Each Party to this Agreement represents and
warrants that he, she or it is competent to enter into the Agreement and in doing so is acting upon
his, her or its independent judgment and upon the advice of his, her or its own counsel and not in
reliance upon any warranty or representation, express or implied, of any nature or kind by any
other Party, other than the terms expressly set forth in this Agreement.
9. NO REMOVAL. Settling Defendants hereby waive any right to remove this case to
federal court upon the filing of the Consolidated and Amended Complaint to effectuate the terms of
this settlement, so long as the terms of the order providing for its filing and, if the Effective
Date does not occur, its withdrawal, are complied with and enforced in all respects. They likewise
affirmatively state that none of them will consent to the removal of this case to federal court.
All Parties agree that the Circuit Court of Kanawha County, West Virginia shall be the exclusive
forum for the resolution of this action.
10. NO RELEASE OF THE RAL LENDING BANKS. Nothing in this Agreement shall be construed
to operate as a release of the RAL lending banks including but not limited to, Beneficial National
Bank, Household Bank f.s.b., Imperial Capital Bank and HSBC.
38
XVII. [FILED UNDER SEAL] [***]
IN WITNESS WHEREOF, the undersigned parties hereto have caused this Agreement to be duly
executed on the date first written above:
| BAILEY & GLASSER, LLP | TAYLOR, MARTINO & KUYKENDALL | |||||||
By:
|
By: | |||||||
| Brian A. Glasser, Esq. | Frederick T. Kuykendall III, Esq | |||||||
| Counsel to the West Virginia Cummins | Counsel to the Green/Mitchell Class | |||||||
| Class and Coordinating Counsel | ||||||||
| LEVY ANGSTREICH FINNEY BALDANTE, | KIRBY McINERNEY & SQUIRE, LLP | |||||||
| RUBENSTEIN & COREN, P.C. | ||||||||
By:
|
By: | |||||||
| Steven E. Angstreich, Esq. | Daniel Hume, Esq. | |||||||
| Counsel to the Green/Mitchell Class | Counsel to the State Law Class | |||||||
| FUTTERMAN & HOWARD, CHTD. | MUCH SHELIST FREED DENENBERG | |||||||
| AMENT & RUBENSTEIN, P.C. | ||||||||
By:
|
By: | |||||||
| Ronald L. Futterman, Esq. | Michael B. Hyman, Esq. | |||||||
| Counsel to the State Law Class | Counsel to the State Law Class | |||||||
| RODDY KLEIN & RYAN | RONALD FREDERICK & ASSOCIATES LLC | |||||||
By:
|
By: | |||||||
| John Roddy, Esq. | Ronald Frederick, Esq. | |||||||
| Counsel to the Becker Class | Counsel to the Becker Class | |||||||
| LAW OFFICES OF CHARLES J. PIVEN, P.A. | ||||||||
By: |
||||||||
| Charles J. Piven, Esq. | ||||||||
| Counsel to the Green/Mitchell Class | ||||||||
39
H&R BLOCK, INC., H&R BLOCK
SERVICES, INC., H&R BLOCK TAX
SERVICES, INC., BLOCK FINANCIAL
CORP., HRB ROYALTY, INC., H&R
BLOCK EASTERN ENTERPRISE, INC.,
successor H&R BLOCK EASTERN TAX
SERVICES, INC.
SERVICES, INC., H&R BLOCK TAX
SERVICES, INC., BLOCK FINANCIAL
CORP., HRB ROYALTY, INC., H&R
BLOCK EASTERN ENTERPRISE, INC.,
successor H&R BLOCK EASTERN TAX
SERVICES, INC.
By:
Printed Name: Mark A. Ernst
Title: President & CEO
40
Exhibit 10.5
A
IN
THE CIRCUIT COURT OF KANAWHA COUNTY, WEST VIRGINIA
DEADRA
D. CUMMINS, on her own behalf
and
(SEAL)
on behalf of those similarly situated, and
IVAN and LaDONNA BELL, on their own behalf
and on behalf of those similarly situated,
on behalf of those similarly situated, and
IVAN and LaDONNA BELL, on their own behalf
and on behalf of those similarly situated,
| /s/ Cathy S. Gatson Clerk | ||
| CATHY S. GATSON CLERK | ||
| KANAWHA CTY, CIRCUIT COURT |
Plaintiffs,
v.
|
Civil Action No. 03-C-134 |
H
& R
BLOCK, INC., H & R BLOCK
TAX SERVICES, INC., H & R BLOCK
EASTERN TAX SERVICES, INC.,
BLOCK FINANCIAL CORPORATION,
H&R BLOCK SERVICES, INC.,
MELANIE LESTER, JASON BROWN,
BOBBY HAGUE, ROBERT HECKERT,
CYNTHIA LANTZ, CLARENCE E. MILLER,
CARLA R. LEWIS, DEBRA RIGGLEMAN
and JOHN DOE,
TAX SERVICES, INC., H & R BLOCK
EASTERN TAX SERVICES, INC.,
BLOCK FINANCIAL CORPORATION,
H&R BLOCK SERVICES, INC.,
MELANIE LESTER, JASON BROWN,
BOBBY HAGUE, ROBERT HECKERT,
CYNTHIA LANTZ, CLARENCE E. MILLER,
CARLA R. LEWIS, DEBRA RIGGLEMAN
and JOHN DOE,
Defendants.
ORDER GRANTING PLAINTIFFS’
MOTION FOR CLASS CERTIFICATION
MOTION FOR CLASS CERTIFICATION
Pending before this Court is the Plaintiffs’ Motion for Class Certification pursuant to
Rule 23 of the West Virginia Rules of Civil Procedure. Based on the findings of fact and conclusions
of law that follow, the Court determines that this case permits resolution of a myriad claims in a
single, efficient class action that poses no unusual problems of manageability. If these claims are
to be resolved at all, they will likely be resolved on a class-wide basis. Further, class-wide
resolution will not require evaluation of individual factual scenarios for each class member.
Instead, because Plaintiffs’ claims center on the Defendants’ conduct and legal status with respect
to the putative class members generally, this case is particularly well-suited for class
certification. Accordingly, the Court GRANTS the motion and certifies the class as proposed and as
indicated by the following findings of fact and conclusions of law.
PROCEDURAL BACKGROUND
| 1. | The plaintiffs filed this action as a putative class action in the Circuit Court of Kanawha County on January 23, 2003. The Defendants timely removed the action to the federal district court for the Southern District of West Virginia. On June 6, 2003, Judge Goodwin granted the Plaintiffs’ Motion to Remand. | |
| 2. | The defendants then moved to dismiss and to compel arbitration. Following the hearings on December 11, 2003, and March 18, 2004, this Court denied Defendants’ motion to dismiss and compel arbitration by Order of May 13, 2004. | |
| 3. | The Defendants then petitioned the Supreme Court of Appeals of West Virginia for a writ of prohibition to prevent this Court from enforcing its Order denying their motion to dismiss and compel arbitration. The Supreme Court ordered the plaintiffs to respond to defendants’ Petition, which was then denied on September 2, 2004. | |
| 4. | The Plaintiffs’ Motion for Class Certification was filed on October 1, 2003. The defendants responded on May 13, 2004, and plaintiffs filed their reply on October 18, 2004. The Court held a hearing on the motion for class certification on October 21, 2004. | |
| 5. | Before taking up that motion, the Court heard argument on Plaintiffs’ Motion to Amend the Complaint to add two corporate subsidiaries of defendant H & R Block, Inc. The Court granted plaintiffs’ motion to add Block Financial Corporation and H & R Block Services, Inc., and ordered that the evidence on Plaintiffs’ Motion for Class Certification be held open until a second hearing on this matter could be held on December 22, 2004, to provide these two new |
2
| corporate subsidiaries and defendants an opportunity to present evidence or argument in opposition to Plaintiffs’ Motion for Class Certification, should they choose to do so. (Transcript from Hearing Held on Oct. 21, 2004, at p. 17). | ||
| 6. | Discovery commenced and more than thirty depositions have been taken. Several sets of written discovery have been exchanged. | |
| 7. | The newly added defendants, Block Financial Corporation and H & R Block Services, Inc. appeared at the December 22, 2004 hearing on class certification through their counsel, Ancil G. Ramey of Steptoe & Johnson. | |
| 8. | Prior to the December 22, 2004 hearing, Mr. Ramey filed a “Motion to Compel Arbitration Or In The Alternative, To Dismiss”, which asked this Court to compel arbitration or to dismiss based on three grounds: (1) lack of personal jurisdiction, (2) failure to state a cause of action, and (3) federal preemption. This Court then denied both the motion to compel and the motion to dismiss and ordered the new defendants to file an answer. | |
| 9. | At the December 22, 2004 hearing, the Court asked Mr. Ramey to present any evidence or argument he had to offer in regard to the class certification issue. | |
| 10. | Mr. Ramey acknowledged that he had no evidence, but he did present argument. Mr. Ramey argued that because his clients had recently been added to this action, due process dictates that they receive additional time to conduct discovery as it would pertain to the class certification issue. (Excerpt of Hearing RE: Class Certification, December 22, 2004, p. 4-5). |
3
| 11. | Mr. Ramey admitted that he had reviewed the record and was familiar with the case due to his prior representation of the other defendants in their removal petition. | |
| 12. | When asked what new information the new defendants sought, Mr. Ramey stated that he would ask if the plaintiffs knew about the participation interest and if they did, whether or not they would have entered into the loan transactions. (Excerpt of Hearing RE: Class Certification, December 22, 2004, p. 3-4). | |
| 13. | Additionally, Mr. Ramey stated that the additional time he was seeking was to ask whether the plaintiffs would have participated in the rapid refund RAL program if they had known that the lending banks paid a fee in order to participate in the loan program. (Excerpt of Hearing RE: Class Certification, December 22, 2004, p. 5). | |
| 14 | Mr. Ramey urged the Court to consider the recent Supreme Court of Appeals of West Virginia opinion in State of West Virginia ex rel. Chemtall Inc. v. Madden, 2004 WL 2750996 (W.Va.,2004). | |
| 15 | The Court has reviewed all the pleadings and evidence in support of and in opposition to Plaintiffs’ Motion for Class Certification, as well as all the other pleadings in the case, and heard argument of counsel spread on the record at the hearings on class certification of October 21, 2004 and December 22, 2004. | |
| 16 | Each party submitted proposed findings of facts and conclusions of law in regard to the motion for class certification. |
4
FINDINGS OF FACT
The Underlying Claims
| 1. | This action is against Defendant H & R Block, Inc., its named corporate subsidiaries (hereinafter collectively referred to as “Block”) and the individual tax preparers. | |
| 2. | The plaintiffs’ claims against the defendants all relate to the Rapid Refund Program that Block offers to its clients. The Rapid Refund Program utilizes refund anticipation loans (hereinafter “RAL” or “RALs”). | |
| 3. | A RAL is a loan against a taxpayer’s expected federal income tax refund. | |
| 4. | H&R Block offers RALs in West Virginia and throughout the United States. | |
| 5. | Block negotiated contracts with certain lending banks that finance the RALs. The contracts set forth the RAL application procedure, the RAL terms, the RAL credit criteria, and the RAL prices and other matters. | |
| 6. | Block then marketed the RAL to a target demographic. Block defines its “RAL client profile” as “decent, hardworking people,” who are “unsophisticated” financially, and “live pay check to pay check.” Such clients were “very satisfied with the H&R Block experience,” but “have little understanding of what they were paying for their RAL.” Clients take RALs because they want “to get their money quickly,” they “do not have regular bank accounts,” can have tax preparation fees withheld, and “have no other choice to get money quickly.” Over one-half get the earned income tax credit. Most “do not have credit cards or other credit options.” | |
| 7. | Block tax preparers who presented these documents to the clients were trained by Block to present the RAL product using a formulaic sales script, in which the |
5
| loan products were presented in the same order and described using the same terms to every client. Block also provided the tax preparers with computer hardware and software for use with its RAL customers. | ||
| 8. | Block filled out and completed the RAL applications for the clients and directed the clients to the several places where they were to sign the documents. Block then assembled the actual RAL application and presented it to the bank. | |
| 9. | At the class certification hearing on October 21, 2004, the Court heard testimony from Deborah Mounts, Block’s franchise district manager for its franchise offices in West Virginia, Ms. Mounts testified that Block provides national advertising, merchandise, signs, copiers, toner for the copiers, pamphlets, light boxes, furniture, and yellow page ads to its franchises. (Trans. from October 21, 2004 Hearing, p. 31-34.) Block provides capital to its franchisees in the form of a loan secured by the franchise. (Id. at 35-36.) Block provides training material and consulting services to its franchises. (Id. at 37-38.) In return, Block collects royalties and receives the participation fee from the RALs sold by the franchises. (ld. at 43.) | |
| 10. | Block does not believe it should tell its clients about its participation fee and does not tell its tax-preparers about this fee. (Id. at 45.) Thus, any disclosure of that fee came, if at all, from written material distributed to clients which was the same on a year by year basis in all Block’s offices in West Virginia. Block believes that the clients who go to its franchises belong to Block, not to the franchise. (Id.) | |
| 11. | The plaintiffs aver that the defendants’ actions, in regard to the RAL process, amounts to a breach of a fiduciary duty owed to the plaintiffs. The plaintiffs also |
6
| aver that the royalties and participation fees are “kickbacks” which violate West Virginia law governing credit services organizations and deceptive practices. | ||
| 12. | The Second Amended Complaint contains seven counts, which include the following: |
| (1) | Breach of Fiduciary Duty Arising Out of an Agency Relationship; | ||
| (2) | Breach of Fiduciary Duty Arising Out of a Confidential Relationship; | ||
| (3) | Breach of Fiduciary Duty Arising out of H&R Block’s Status as a Loan Broker; | ||
| (4) | Breach of West Virginia’s Statute Governing Credit Services Organizations; | ||
| (5) | Breach of Contract based on implied duty of good faith and fair dealing; | ||
| (6) | Unjust Enrichment; and | ||
| (7) | Unfair or Deceptive Acts or Practices. |
| 13. | The claim for unjust enrichment seeks recovery of the plaintiffs’ money that the defendants received in connection with the RALs, plus reasonable interest. | |
| 14. | The Plaintiffs propose a class consisting of all West Virginia residents who obtained Refund Anticipation Loans (“RALs”) from January 1, 1994 through the present.1 At the October 21 hearing, plaintiffs’ counsel proposed the class should be cut off on December 31, 2003 to provide a date certain for class determination. (Id. at p. 15), |
| 1 | Two subclasses are proposed: | |
| Sub-class A: All West Virginia residents who obtained RALs from October 27, 1999 to July 29, 2003. | ||
| Sub-class B: All West Virginia residents who obtained RALs from January 1, 1994 to October 26, 1999. | ||
7
| 15. | As is evident from the definition, whether an individual is a member of the class is based on the objective facts of whether a West Virginia resident obtained a RAL and when he or she obtained the RAL. | |
| 16. | The parties have also submitted uncontradicted evidence that the proposed class contains more than 438,500 transactions. | |
| 17. | Block either prepared tax returns for all class members or checked their returns before filing. | |
| 18. | The process was basically the same for every RAL client. | |
| 19. | Block presented the same or substantially the same RAL applications, and documents to every RAL client, at least on a year-to-year basis. (Id. at 57-58.) | |
| 20 | The contracts between H&R Block and the lending banks created the common framework against which all the RAL applications were considered and all the RALs were processed. Additionally, these contracts apply to all RALs the defendants offered in West Virginia. | |
| 21 | Each of the named plaintiffs understands that he or she is representing a number of unnamed class members in this case, and understands that he or she owes a duty to treat those absent class members fairly. | |
| 22. | The named plaintiffs are represented by the law firm of Bailey & Glasser, LLP, whom they move to appoint as lead class counsel. John Barrett of the Barrett Law Firm is proposed as co-counsel. | |
| 23. | Plaintiffs have moved for certification under Rule 23(b)(3). |
8
STATEMENT OF THE LAW
| 1. | The claims based on the West Virginia Consumer Credit and Protection Act and the prohibitions against unfair methods of competition and unfair or deceptive acts or practices is based on the definitions of such actions, as they are defined in West Virginia Code, section 46A-6-102(f). | |
| 2. | The prohibited acts include “[t]he act use or employment by any person of any deception, fraud, false pretense, false promise or misrepresentation, or the concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any goods or services, whether or not any person has in fact been misled, deceived or damaged thereby.” W.Va. Code, §46A-6-102(f)(13) (emphasis added). | |
| 3. | The Court recognizes that a determination of class status should occur as soon as practicable after the filing of the action, and believes that this issue is now ripe for determination. | |
| 4. | “In general, class actions are a flexible vehicle for correcting wrongs committed by a large-scale enterprise upon individual consumers.” In re West Virginia Rezulin Litigation, 214 W. Va. 52, 62, 585 S.E.2d 52, 62 (2003). | |
| 5. | On a motion for class certification, a court should not inquire into the merits of the parties’ contentions. See Syl. Pts, 6 & 7, Rezulin, 214 W.Va. 52. “The dispositive question is not whether the plaintiff has stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 have been met.” Rezulin, Syl. Pt. 7. |
9
| 6. | Under Rule 23(a) of the West Virginia Rules of Civil Procedure, a class action is appropriate when the party seeking to certify a class has proved that: |
| (a) | the class is so numerous that joinder of all members is impracticable; |
||
| (b) | there are questions of law or fact common to the class; | ||
| (c) | the claims or defenses of the representative parties are typical of the claims or defenses of the class; and | ||
| (d) | the representative parties will fairly and adequately protect the interests of the class. |
W. Va. Rules of Civil Procedure, Rule 23(a)
Numerosity
| 7. | Rule 23(a)(1) requires that a class be so numerous that joinder of all members is impracticable. Rezulin, Syl. pt. 9. |
Commonality
| 8. | Rule 23(a)(2) requires that there be questions of law or fact common to the members of the proposed class. “[A] common nucleus of operative fact or law is usually enough to satisfy the commonality requirement.” Rezulin, Syl. Pt. 11. | |
| 9. | The threshold of “commonality” is not high, and requires only that the resolution of common questions that affect all or a substantial number of class members. Rezulin, Syl. pt. 11. | |
| 10. | The Court in Rezulin quoted from Newburg on Class Actions, 4th Ed., § 3:12 at 314-315 (2002), when it stated the following: |
| “Individual issues will often be present in a class action, especially in connection with individual defenses against class plaintiffs, rights of individual class members to recover in the event a violation is established, and the type or amount of relief individual class members may be entitled to receive. Nevertheless, it is settled that the common issues need not be dispositive of the litigation. The fact that class members must individually demonstrate their right to recover, or that they may suffer varying degrees of injury, will not bar a class action; nor is a class action precluded by the presence of individual defenses against class plaintiffs.” |
Rezulin,
214 W. Va. at 68.
10
Typicality
| 11. | Rule 23(a)(3) requires that the claims of the representative party be “typical” of those of the class. Typicality focuses on the desired characteristics of the class representative. |
| 12. | The Rezulin Court held that “a representative party’s claim or defense Is typical if it arises from the same event or practice or course of conduct that gives rise to the claims of the other class members, and if his or her claims are based on the same legal theory.” Rezulin, Syl. Pt. 12. | |
| 13. | The Court further explained that typicality: |
“only requires that the class representative’s claims be typical of the other
class members’ claims not that the claims be identical,... When the claim arises
out of the same legal or remedial theory, the presence of factual variations is
normally not sufficient to preclude class action treatment....[D]ifferences in the
situation of each plaintiff or each class member do not necessarily defeat
typicality; the harm suffered by the named plaintiffs may differ in
degree from that suffered by other members of the class so long as the harm suffered
is of the same type. Furthermore, the fact that a defense may be asserted against
the named representative, as well as some other class members, but not the class
as a whole, does not destroy the representative’s status.
Rezulin, 214 W.Va. at 67-68.
Adequacy of Representation
| 14. | Rule 23(a)(4) requires that the representative parties must fairly and adequately protect the interests of the class. |
| 15. | The first part of Rule 23(a)(4) tests the representative party’s attorneys’ ability to vigorously represent the entire class based on available resources to investigate claims and contact class members, and the attorneys’ overall competence and experience. Id. at Syl. Pt. 13. |
11
| 16. | The class representatives must “share a strong interest in establishing the liability of the defendants and seek the same types of relief and damages requested for other class members.” Rezulin, 214 W. Va. at 69. |
| 17. | The second part of Rule 23(a)(4) inquires whether there are “conflicts of interest between named parties and the class they seek to represent.” W. Va. R, Civ. P. 23(a)(4). |
Rule 23(b) Requirements
| 18. | An action that satisfies all of the Rule 23(a) requirements may be maintained as a class action if the court finds that it also meets one of the three prerequisites of Rule 23(b). Rezulin, Syl. Pt. 8. |
| 19. | Under Rule 23(b)(3), a class action may be certified to proceed on behalf of a class if the trial court finds “that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members” and finds that a class action “is superior to other available methods for the fair and efficient adjudication of the controversy.” W. Va. R. Civ. P. 23(b)(3). |
| 20. | “The predominance criterion in Rule 23(b)(3) is a corollary to the ‘commonality’ requirement found in Rule 23(a)(2). While the commonality requirement simply requires a showing of common questions, the ‘predominance’ requirement requires a showing that the common questions of law or fact outweigh individual questions.” Rezulin, 214 W. Va. at 71. | |
| 21. | “A conclusion on the issue of predominance requires an evaluation of the legal issues and the proof needed to establish them.” Id. at 72. The predominance requirement is not a rigid test, but rather contemplates a review of many factors, |
12
the central question being whether “adjudication of the common issues in the
particular suit has important and desirable advantages of judicial economy compared to
all other issues, or when viewed by themselves.” Id. (citations omitted).
| 22. | The Chemtall case cited by Mr. Ramey in his argument for additional time to conduct discovery held that West Virginia courts should conduct a thorough analysis of motions to certify, and if a court grants the motion, it should enter a specific, detailed order, with relevant findings of fact and conclusions of law, that indicates the basis for certification and the satisfaction of Rule 23 prerequisites. State of West Virginia ex rel. Chemtall Inc. v. Madden, 2004 WL 2750996 (W.Va.,2004). |
CONCLUSIONS OF LAW
Due Process Argument
| 1. | The Court finds that Mr. Ramey did not offer any convincing reason for this Court to grant the new defendants additional time for discovery relating to class certification issues. |
| 2. | The Court has reviewed the Chemtall opinion and believes that it has conducted a thorough analysis of the issues presented and believes that such an analysis is evident from this detailed Order. |
| 3. | Mr. Ramey’s reasons for asking for additional discovery time did not relate to class certification issues, rather they went to the merits of the claims. |
| 4. | Supreme Court case law dictates that this Court should not inquire into the merits of the claims when reviewing a motion for class certification. |
13
| 5. | Whether or not the plaintiffs would have engaged in the RAL program if they knew of the alleged kickbacks and hidden fees does not affect the maintainability of this action as a class action. The new defendants have failed to show to this Court how such information relates to any of the Rule 23 factors. |
| 6. | The fact that certain class members would have signed the RAL had they known of the fees, and the fact that others would not have signed the RAL with this information does not affect the class certification issue at hand. Although one might question whether this affects typicality, it does not in this instance because it is not pertinent to the underlying claim. The plaintiffs need not aver or prove that they were in fact misled, deceived, or even damaged to prove a prima facie case of unfair and deceptive practices. |
| 7. | Therefore, the Court does hereby find that the new defendants, represented by Mr. Ramey, were given sufficient notice and opportunity to be heard on class certification and presented no reasons, related to the certification issue, for which this Court is willing to grant additional time for discovery. |
Class Definition
| 8. | The Court finds the proposed class is objectively defined as it is easily determined whether a particular individual is a member of the class. |
Numerosity
| 9. | Given that there are more than 438,500 transactions, although some of these transactions may represent repeat customers, the Court finds and concludes that he proposed class is so numerous that joinder of all of its members would be impracticable and numerosity is satisfied. |
14
Commonality
| 10. | The Court finds that there is no factual basis to distinguish the claims of proposed class members at Block-owned offices from those at franchise offices.2 |
| 11. | In fact, there are numerous questions of law and fact common to class members. Some of those common issues of law and fact include the following: |
| a. | Whether Block was required to comply with West Virginia’s law governing credit services organizations when it arranges refund anticipation loans; | ||
| b. | Whether the class members are buyers within the meaning of the credit services organizations statute; | ||
| c. | Whether Block negotiates contracts with lenders, funnels its RAL customers to the lenders, and then receives payment for that referral; | ||
| d. | Whether Block secretly concealed profits made on brokering RAL’s; | ||
| e. | Whether Block was the taxpayers’ agent or broker; | ||
| f. | Whether Block had a confidential relationship with the taxpayer that would create a fiduciary duty; and if so, did Block breach that duty; and | ||
| g. | Whether Block breached the contract to obtain RAL’s or was unjustly enriched at the expense of class members. |
| 12. | Because the class members’ claims directly relate to the RAL that was offered each year, and based on the questions of law and fact for each of those years, this Court finds that resolution of common questions that affect all or a |
| 2 | Ms. Mounts also testified at the October 21,2004 hearing that Block’s Williamson, West Virginia franchise uses a different computer software platform for obtaining RALs. (Hearing Trans. at 67-68.) This testimony contradicts that given by Block’s corporate representative on franchises. (Ex. C, Pis.’ Reply to Defs.’ Mem, of Law in Supp. of Mot. for Part’l Summ. J.) Nevertheless, should the evidence ultimately show that the Williamson Block franchise RALS are materially different from those in the rest of Block’s West Virginia offices, those RALs can be excluded from the class. |
15
| substantial number of class members can be achieved through the maintenance of a class action. | ||
| 13. | For these reasons, the Court finds and concludes that commonality is satisfied. |
Typicality
| 14. | As described above, the offer and application process for the RAL constitute a common practice and course of conduct that establish typicality. Those events did not differ for the representative plaintiffs in any respect relevant to typicality. Plaintiffs’ claims focus squarely on Block’s conduct and do not depend on customer-specific representations. |
| 15. | Additionally, the representative plaintiffs’ claims are based on the same legal theory as those of the class generally. Plaintiffs claim that as a tax prepare, loan broker, and agent, Block had a duty to its clients. They further claim that Block breached that duty by failing to disclose its self-dealing according to plaintiffs and brokering a loan while hiding the participating fee. | |
| 16. | Block complains that Deadra Cummins and Ivan and LaDonna Bell are not typical of the class because each had individual reasons to get a RAL and individual reactions and experiences when they got the RAL. Contrary to Block’s contention, however, Cummins and the Bells are “typical” of RAL borrowers in the ordinary, everyday sense of the word “typical.” These representative plaintiffs are just the type of people Block targets for its RAL-product. | |
| 17. | Ordinary typicality, however, is not tested under Rezulin. The test is legal typicality, whether Cummins’ and the Bells’ claims are “typical” of the class claims, in fact and law. This Court finds that the claims of the proposed class |
16
| representatives are typical of those claims of the several class members as they share essentially the same facts and require the same legal analysis as it relates to the individual counts included in the Second Amended Complaint. | ||
| 18. | The claim for unjust enrichment seeks recovery of monies paid by each plaintiff. The facts relevant to recovery for each member of the class are virtually identical. |
| 19. | Because unjust enrichment is predicated in equity, the Court finds that all members of the class can be adequately protected through the maintenance of a class action. |
| 20. | The defendants claim that individual issues of trust and reliance abound in regard to the plaintiffs’ claims based on an alleged fiduciary duty. However, whether or not the defendants were agents, loan brokers, or credit services organizations does not vary from client to client. The relationship, if any, was formed from the RAL application process. |
| 21. | Additionally, if the defendants were agents, loan brokers, or credit services organizations, the duty each defendant owed to each class member does not vary or depend on the class member; it can be determined from the RAL documents and the alleged systematic actions of the defendants when offering and providing RALs through their Rapid Refund Program. |
| 22. | The unfair and deceptive practices claim will depend on a determination as to whether the services offered by Block were “goods” and whether Block’s conduct constitutes a consumer transaction that occurred in the course of trade or commerce. Whether or not the plaintiffs can recover will depend on whether the |
17
defendants’ actions amount to “methods of’ competition and unfair or deceptive
acts or practices” as defined by West Virginia Code, section § 46A-6-102.
| 23. | The acts and practices that will be pertinent to this determination are based on the defendants’ actions in offering and providing RALs. To the extent that the defendants used the same techniques, procedures, and RAL applications, there is no variance between class members and no individual issues that would defeat commonality. |
| 24. | The breach of contract claim, based on an implied duty of good faith, will be reviewed according to the contract, if one is found, and whether or not the defendants acted in good faith and fair dealing in its disclosures and actions. The plaintiffs’ averments were sufficient to avoid a dismissal for failure to state a claim, but this claim, and all others, may be removed from class certification or otherwise dismissed if further evidence dictates such a decision. |
| 25. | The Court has considered and rejected Block’s claim that Ms. Cummins cannot maintain her claims because in February 2003 she obtained another RAL from Jackson Hewitt. As Plaintiffs’ counsel pointed out at argument, Ms. Cummins obtained this RAL from a Block competitor, and not from Block. This case pertains to Block’s conduct and Block’s disclosures. It has nothing to do with some other company’s conduct and disclosures. |
| 26. | Block also has argued that the named plaintiffs “lack standing” to challenge the RAL process in 1994 and 2003 when none of them actually obtained RALS through Block in those years. This is not a standing question. Plaintiffs have standing because they suffered injury in fact, fairly traceable to the defendants, |
18
and for which the Court can provide a remedy. See Lujan v. Defenders of
Wildlife, 504 U.S. 555 (1992). Instead, this argument attempts to attack typicality. As
noted above, however, the named plaintiffs’ claims need only be typical, but not
identical, to those of the class. See Rezulin at 67-68.
| 27. | Based on the foregoing, the claims of the named Plaintiffs are typical of the claims of the proposed class and, accordingly, the Court finds and concludes Plaintiffs satisfy the typicality requirement. |
Adequacy of Representation
Class Representatives
| 28. | No party has demonstrated any conflicts of interest between the named plaintiffs or proposed class counsel and the proposed class. |
| 29. | The Court finds each named plaintiff has a common sense and sufficient understanding of his or her duties as a class representative and the legal and factual basis for his or her claim. |
| 30. | The class representatives “share a strong interest in establishing the liability of the defendants and seek the same types of relief and damages requested for other class members.” Rezulin, 214 W. Va. at 68. All plaintiffs seek disgorgement of funds wrongfully withheld, as well as statutory penalties. While amounts of individual damages may vary, the formulas and methodology for recovery are the same. |
Class Counsel
| 31. | Several individual attorneys making appearances on behalf of the plaintiffs have been counsel to certified classes in the past. The pleadings and argument on |
19
behalf of the plaintiffs have been thoughtful, competent and professional. From
their performance thus far in this case, the Court finds that Plaintiffs attorneys are
competent and experienced not only in general matters of civil litigation, but also
specifically in the area of class action and multi-plaintiff litigation.
| 32. | While the defendants made allegations of unethical conduct against proposed class counsel, such conduct, even if committed, does not provide reason for this Court to find that a conflict exists between the class and the class representatives or between the class and proposed counsel for the class. |
| 33. | The Court further finds that Plaintiffs’ attorneys possess the available resources to investigate the claims and prosecute this litigation. |
| 34. | The Court finds and concludes that the named plaintiffs and proposed class counsel together and individually will fairly and adequately protect the interests of the class. |
| 35. | Based on the Rezulin decision, the Court finds that Plaintiff has satisfied all the Rule 23(a) requirements of numerosity, commonality, typicality and adequacy. |
Rule 23(b)(3) Requirements
| 36. | Defendants have not identified any individual issues that would negate a finding that the common issues predominate. |
| 37. | Both parties claim that common issues, fundamental to plaintiffs’ theories of the case, can be adjudicated on cross-motions for summary judgment. Both parties have, in fact, already moved for summary judgment and briefed the issues whether Block is a loan broker, a credit services organization, or acts as the agent of its RAL clients. Both parties have also moved for summary judgment on |
20
and
briefed the issues of whether Block has a fiduciary duty to its RAL
clients; and whether Block’s acts were unfair or deceptive.
| 38. | On both parties’ own account, therefore, the fundamental legal issues of this action predominate in the Rule 23 sense that they may be determined by the Court for all class members because both parties agree, there are no questions of material fact and they may be decided as a matter of law. |
| 39. | The Court finds and concludes that because common issues predominate, certifying this case as a class action would provide desirable advantages of judicial economy, when compared with any court’s individual determination of these fundamental questions for even a small number of the plaintiffs represented here. |
| 40. | Finally, and for some of the same reasons set forth above, the plaintiffs have satisfied the Rule 23(b)(3) requirement “that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.’ This requirement focuses upon a comparison of available alternatives.” Rezulin, 214 W. Va. at 75. |
| 41. | “[F]orcing numerous plaintiffs to litigate the alleged misconduct of the defendants in hundreds or thousands of repeated individual trials, especially where a plaintiff’s individual damages may be relatively small, runs counter to the very purpose of a class action.... [T]o determine the superiority of a class action in a particular case[,] other factors must also be considered, as must the purposes of Rule 23, including: conserving time, effort and expense; providing a forum for small claimants; and deterring illegal activities.” Id., at 75-76. |
21
| 42. | Plaintiffs have pursued and Block has defended this case vigorously. Both sides have done substantial discovery and depositions have occurred in no less than four states. Plaintiffs aver that they have spent more than $535,000 in time and expense so far. By contrast, the most any individual class member could recover, even assuming all of West Virginia’s statutory penalties apply, would be about $3,700 per transaction. |
| 43. | As Judge Posner recently observed, “[A] class action has to be unwieldy indeed before it can be pronounced an inferior alternative — no matter how massive the fraud or other wrongdoing that will go unpunished if class treatment is denied —to to no litigation at all.” Carnegie v. Household Int’I, Inc., 376 F.3d 656, 661 (7th Cir. 2004). |
| 44. | The Court finds and concludes that a class action is the superior, if not the only realistic way to resolve this dispute. The cost of pursuing an individual claim such as this would be so far outweighed by the cost that the only real alternative to a class action would be no action at all. |
| 45. | For the reasons set forth above and the record herein, the Court GRANTS Plaintiff’s motion for class certification as follows: |
| (a) | The class proposed by plaintiffs is CERTIFIED, consisting of all West Virginia residents who obtained Refund Anticipation Loans (“RALs”) from January 1,1994 through the present, as to all claims contained in the plaintiff’s Second Amended Complaint. | ||
| (b) | Deadra D. Cummins and Ivan and Ladonna Bell will be class representatives; and |
22
| (c) | Bailey & Glasser, LLP, will be lead counsel. | ||
| (d) | This class certification is conditional. If further discovery uncovers evidence that negates the maintainability of this class action, the Court may decertify, alter, or amend this order. |
Accordingly, the case may proceed as a class action pursuant to Rule 23(a) and
Rule 23(b)(3).
Within ten days of the date of entry of this Order, plaintiffs shall provide the
Court and all counsel a proposed notice and opt-out form for approval.
Within ten days from the date that plaintiffs provide counsel with the proposed notice,
defense counsel shall submit to the Court and plaintiffs’ counsel a written response to the
proposed notice and opt-out form.
The Court notes and preserves the objections of all parties.
The
Clerk is DIRECTED to send a certified copy of this Order to all counsel of record.
ENTERED
this
30th day of December, 2004.
| /s/ Louis H. Bloom | ||||
| Honorable Louis H. Bloom |
12/30/04
BS/MV/AR
BS/MV/AR
23
IN THE CIRCUIT COURT OF KAWAWHA COUNTY
WEST VIRGINIA
DEADRA D. CUMMINS, et als,
Plaintiffs
vs.
|
Civil Action No. 03-C-134 |
H & R BLOCK, INC., et als,
Defendants
BEFORE: Hon. Louis H. Bloom
Excerpt of Hearing
RE: Class Certification
December 22, 2004
Connie L. Cooke
Official Reporter
2
BE IT REMEMBERED, that the following is an excerpt from a hearing in the matter of
DEADRA D. CUMMINS, et als, Plaintiffs versus H & R BLOCK, INC., et als, Defendants, upon Civil
Action No. 03-C-134, as stated in the caption hereto, the following transpired:
THE COURT: What further would you inquire? Specifically, what questions would you like to
ask? What discovery that you already have — I’m not going to allow you to duplicate anything that
is in the record —
MR. RAMEY: Absolutely, and I don’t want to do that, your Honor.
First of all, one of the problems
with the Complaint is it only mentions my clients, and it refers collectively to —
THE COURT: My question to you, sir, was what specific discovery would you want to
undertake?
MR. RAMEY: I would want to undertake — I would want an explanation of the specific causes
of action they are alleging against my clients, the specific facts upon which those —
THE COURT: This is a notice of pleading in West Virginia. I would like to know
specifically
3
what questions you would ask, and who would you ask them?
MR. RAMEY: I would ask what acts or omissions were committed by my clients
specifically upon which, for example, in class certification, class certification is based.
I would ask for the production of
any documents in the possession of the plaintiffs that were in furtherance of these issues of class
certification.
One of my clients is Block Financial Corporation —
THE COURT: Then I would hear your arguments based on the record as developed by the
plaintiff at this point. If you have arguments that your folks aren’t involved in this, now is the
time to do it.
MR. RAMEY: Okay. The other questions I would ask is apparently the plaintiffs’ claim
against Block Financial Corporation is that Block Financial Corporation had a participation
interest in some of the loans that were made. I have not been given an opportunity, nor have the
plaintiffs been asked, for example, Did you know about a participation interest?
4
Had you known of a participation interest, would it have caused you not to enter into these
loan transactions?
No one has asked those questions
because may clients weren’t in the case, and I believe that I deserve, as a matter of due process
and the Rules of Civil Procedure, to ask these plaintiffs specific questions regarding that
particular claim.
For example, your Honor,
McDonald’s, you go to McDonald’s, they pay franchise fees. I would ask these plaintiffs, Well, you
claim that you would not have entered into these transactions if you knew that Block Financial
Corporation had a participation interest in these loan transactions, but when you go to McDonald’s,
were you aware that the local McDonald’s pays a franchise fee? Are you telling me that you would
not buy a Big Mac because you now know, or you wouldn’t have bought a Big Mac back then had you
known that the local franchise pays franchise fees?
No one asked these plaintiffs any
of these questions, because my clients were involved in the case.
My other client is Block Services.
5
And apparently all they’ve done is, banks that want to participate in the loan program pay a
licensing fee. This has nothing to do with the plaintiffs in this case.
I would ask the plaintiffs the same question: If you were aware that the banks — that you
thought, if that’s what your testimony is, were extending you the loan paid a fee in order to
participate in that loan program, would it have made any difference to you? Do you feel you were
damaged by that?
No one asked those questions. And
before a class is certified against my clients, all I’m asking for is an opportunity to ask those
questions, seek that information, develop the record so that I can come into this Court and in a
meaningful manner argue to the Court based upon the evidence why you should not certify questions
as to my two clients, who have only recently been brought into the case. And essentially,
your Honor, my argument is no more than that.
***********
6
STATE OF WEST VIRGINIA,
COUNTY OF
KANAWHA, to-wit :
I, Connie L. Cooke, Official Reporter for the Circuit Court of Kanawha County, do hereby
certify that the foregoing is a true and correct excerpt from the hearing in the above captioned
matter, as reported by me and transcribed into the English language.
Given under my hand this 22nd day of December, 2004.
| /s/ Connie L. Cooke | ||||
| Official Reporter |
B
IN THE CIRCUIT COURT OF MOBILE COUNTY, ALABAMA
LEVON MITCHELL and GERAL MITCHELL,
on behalf of themselves and all others
similarly situated,
on behalf of themselves and all others
similarly situated,
Plaintiffs,
| vs. | CASE NO. CV-95-2067 |
H&R BLOCK, INC., RUTH R. WREN, jointly
and individually,
and individually,
Defendants.
ORDER GRANTING CLASS CERTIFICATION
This matter is before the Court on the Plaintiffs’ Motion for Class Certification.
Plaintiffs seek certification of claims for breach of fiduciary duty, unjust enrichment,
and
breach of contract. All of these claims arise out of Defendant H&R Block, Inc.’s (“Block”)
Refund Anticipation Loan program. The Court finds, after a probing, rigorous analysis
and examination of the pleadings, Plaintiffs’ Motion for Class Certification, the
evidence submitted by Plaintiffs, all other evidence of record, the briefs of the
parties, the oral argument of counsel, and the applicable law, that Plaintiffs have
established their entitlement to class certification under Ala.R.Civ.P. 23 and Ala.
Code 1975 § 6-5-641(e). Specifically, the Court finds that the Plaintiffs, as the
parties with the burden of proof on class certification, have satisfied the requisites
of Ala.R.Civ.P. 23(a) and 23(b)(3) for certification of a class. The Court understands
that a class action is not maintainable by virtue of its designation as such in the
pleadings. Therefore, the Court has probed extensively beyond the pleadings and has
devoted much consideration to the evidence
adduced in determining that each requirement of Rule 23(a) and Rule 23(b)(3) has been
satisfied.
The Class shall consist of the following:
BREACH OF FIDUCIARY DUTY/UNJUST ENRICHMENT SUBCLASS
All natural persons who (1) engaged H&R Block, Inc., or its franchisees, to obtain a Refund
Anticipation Loan (“RAL”) In the State of Alabama, (2) who obtained a RAL for which H&R Block,
Inc., received directly or indirectly from a third-party lender either a “licensing fee” payment
and/or a portion of the finance charges paid by the customer pursuant to the loan, (3) at any time
during the period from June 13, 1993, through December 31,1996, and (4) whose RAL application
contained the following or substantially similar provisions: (a) the person authorizes H&R Block,
or H&R Block and Its affiliates, to disclose to a lending Institution the person’s income tax
returns, all information contained in such returns, and all information supplied to H&R Block, for
the purpose of enabling the lending institution to determine whether or not to make an RAL; and (b)
provides that H&R Block may not use or disclose such information for any purpose other than as
stated in the RAL application.
Excluded from the Class are H&R Block, Inc., any parent, subsidiary, or affiliate of H&R Block,
Inc.; the officers, directors, agents, servants, or employees of any of the same; and the members
of the immediate families of any such person. Likewise excluded from the Class are any members of
the Judicial Branch of the State of Alabama, and the members of the Immediate families of any such
person.
BREACH OF CONTRACT SUBCLASS
All natural persons who (1) engaged H&R Block, Inc., or Its franchisees, to obtain a Refund
Anticipation Loan (“RAL”) In the State of Alabama, (2) who obtained a RAL for which H&R Block,
Inc., received directly or indirectly from a third-party lender either a “licensing fee” payment
and/or a portion of the finance charges paid by the customer pursuant to the loan, (3) at any time
during the period from June 13, 1989, through December 31,1996, and (4) whose RAL application
contained the following or substantially similar provisions: (a) the person
2
authorizes H&R Block, or H&R Block and its affiliates, to
disclose to a lending institution the person’s income tax
returns, all information contained in such returns, and all
information supplied to H&R Block, for the purpose of enabling
the lending institution to determine whether or not to make an
RAL; and (b) provides that H&R Block may not use or disclose
such information for any purpose other than as stated In the
RAL application.
Excluded from the Class are H&R Block, Inc., any
parent, subsidiary, or affiliate of H&R Block, Inc.;
the officers, directors, agents, servants, or employees of any of the same; and the
members of the Immediate families of any such person.
Likewise excluded from the Class are any members of the
Judicial Branch of the State of Alabama, and the
members of the immediate families of any such person.
This certification is based upon the following factual and legal
findings:
I. FACTUAL BACKGROUND
Block offers tax preparation services to the general public. In addition
to its tax preparation services, Block offers its customers a service called
“Rapid Refund,” The Rapid Refund program functions in the following manner: for
a fee, Block will electronically file a customer’s tax return with the Internal
Revenue Service (“IRS”), Electronic filing enables the taxpayer to obtain a
refund, if one is owed, in an expedited manner.
Block also offers a service known as “Refund Anticipation Loans” (“RALs”).
Block’s customers must participate in the Rapid Refund program to be eligible
for a RAL. RALs are obtained in the following manner: Block enters into
arrangements with banking institutions (the “lender banks”), whereby they will
extend loans to Block customers. The loans are secured by the customers’
anticipated tax refunds. With a RAL, Block’s customers can receive the loan
proceeds within a few days, faster than a refund obtained through electronic
filing can be received. The RALs are paid off later by the actual refund
3
from the IRS. The lender banks charge a fee for the RAL, which is disclosed to the customer. This
fee is deducted from the amount of the RAL.
Block prepares its customers’ RAL applications and transmits them, the information contained
in its customers’ tax returns, and other information furnished by its customers, to the lender
banks. Block solicits the lender banks’ acceptance of the RAL applications, receives the proceeds
of the RALs, and delivers the proceeds to its customers. The RAL applications give Block authority
to disclose its customers’ tax returns, and all information supplied to Block by its customers, to
the lender banks. The RAL applications also expressly restrict Block from using this information
for any purpose other than enabling the lender banks to determine whether or not to make a RAL, or
as permitted by Treasury Regulation § 301.7216. The RAL applications do not permit Block to use
this information for its own financial gain. Neither does Treasury Regulation
301.7216.1
Plaintiffs allege that under Block’s arrangement with the lender banks, Block received a
“license fee,” characterized as a “kickback” by Plaintiffs, from the lender banks for each
RAL.2 Plaintiffs further contend that although the RAL fee charged by the lender banks
was disclosed to Block’s customers, the license fee paid to Block was not disclosed.3
| 1 | This Treasury Regulation is presently codified at 26 C.F.R. § 301.7216-1, -2 and - -3. It was in effect during the Class Periods in a materially identical form. | |
| 2 | It is undisputed that Block received a license fee from RALs made through its company-owned offices for at least a portion of the Class Periods. Block contends that it did not receive license fees from RALs made to customers of its franchised offices, and that it did not receive license fees before 1992. The Court will address these contentions under its discussion of typicality, infra. | |
| 3 | Block contends that the license fee was disclosed to the named Plaintiffs, and to everyone else who received a RAL through Mellon Bank in 1994. The Court will address this contention in its discussion of typicality, infra. It is established that the license fee was |
4
The license fee payment to Block constitutes a portion of the RAL fee charged by the lender banks.
The amount of the license fee charged by the lender banks varied from year to year during the Class
Periods, but was uniform for any given year.
Block also entered into “pooling agreements” or “participation agreements” with the lender
banks. By the terms of these agreements, Block would buy 49.999999% of the RALs issued by the
lender banks at a discount and realize a profit when the taxpayer’s tax refund paid off the
loan.4 It is undisputed between the parties that, if Block received any money from the
RALs during the class periods because of the pooling agreements, it did not disclose this fact to
its customers.5
Named Plaintiffs Levon Mitchell and Geral Mitchell participated in Block’s Rapid Refund
program and obtained RALs. Levon Mitchell and Geral Mitchell obtained the RAL upon which their
class claims are based in 1995 (for tax year 1994). Their RAL was obtained through Armstrong
Business Services, Inc., a Block-franchised office.
II. LEGAL ANALYSIS
| not disclosed to Block’s customers during the remainder of the Class Periods. Block acknowledges that there were no written disclosures In the RAL transactions other than, Block contends, in 1994. Block makes the purely speculative assertion that class members may have learned about the license fee “from their tax preparer or from press releases or other publicly disseminated documents.” (Block’s Post-Hearing Brief, p. 11). This is based upon one affidavit of a Block customer, which is vague and ambiguous. (Def. Exh. 56, 5). The Court will not credit such guesswork and conjecture. | ||
| 4 | Block contends that It received no income from pooling agreements attributable to RALs made in Alabama during the Class Periods. The Court will address this contention under its discussion of typicality, Infra. | |
| 5 | Although not argued by Block, the Court notes that the alleged disclosure in 1994, discussed subsequently, could encompass the pooling agreements. |
5
Plaintiffs
seek class certification pursuant to Ala. R. Civ. Proc. 23(b){3). As such,
Plaintiffs must meet the criteria for Rule 23(a), as well as the elements set forth in Rule
23(b)(3). Rule 23(a) permits certification where:
(1) the class is so numerous that joinder of all members is
impracticable, (2) there are questions of law or fact common to the
class, (3) the claims or defenses of the representative parties are
typical of the claims or defenses of the class, and (4) the
representative parties will fairly and adequately protect the
interests of the class.
If the criteria of Rule 23(a) are satisfied, an action is maintainable as a Rule 23(b)(3)
class action if:
the court finds that the questions of law or fact common to the
members of the class predominate over any questions affecting only
individual members, and that a class action Is superior to other
available methods for the fair and efficient adjudication of the
controversy.
“The question of class certification is a procedural one distinct from the merits of the
action.” Mitchell v. H&R Block, Inc.,783 So. 2d 812, 816 (Ala. 2000). As the Alabama Supreme Court
held in Allstate Ins. Co. v. Ware, 824 So. 2d 739, 744 (Ala. 2002):
[T]he propriety of class certification does not depend on whether
the putative class members will be able to prove the claims on the
merits. In other words, a court deciding the issue of the propriety
of class certification does not base the decision on the factual
merits of the alleged class claims.
Bearing in mind the Alabama Supreme Court’s directive not to prejudge the merits of the
proposed class claims at the certification stage, the Court will now address the requisites for
class certification.
6
A. Numerosity.
The requirement of Rule 23(a)(1) “relates to the difficulty or inconvenience in joining
class members.” Ex parte Government Employees Insurance Co., 729 So, 2d 299, 303 (Ala. 1999).
“Practicality of joinder is the primary issue in assessing whether the numerosity requirement of
Rule 23(a )(1) is satisfied.” Winn v. Dixieland Food Stores, Inc., 125 F.R.D. 696,699 (M.D. Ala.
1989). An approximation of the potential number of class members will suffice in determining
numerosity. Ex parte Government Employees Insurance Co., 729 So. 2d at 303.
There is no dispute over the existence of this element. Block has admitted in its briefs that
the Class consists of tens of thousands of members. Block’s answers to Plaintiffs’ First Set of
Interrogatories represented that In excess of 32,000 persons obtained RALs in 1993 and 1994 alone.
Edward Feinstein, Block’s 30(b)(6) corporate representative, testified that between 40% and 95% of
all Block clients who electronically file their returns utilize the RAL program.
The Court therefore finds that the Plaintiffs have proven that numerosity is present in this
case.
B. Commonality.
“The commonality requirement has been liberally construed, and It is aimed at determining
whether there is a need for combined treatment and a benefit to be
derived therefrom.” Ex parte
Government Employees Insurance Co., 729 So. 2d at 304 (citation omitted). “[T]here need be only a
single issue common to all members of the class.” Alba Conte & Herbert Newberg, 1 Newberg on Class
Actions, § 3:10, pp. 273-78
(4th ed. 2002).
7
“A common nucleus of operative facts is usually enough to satisfy the commonality requirement
of Rule 23(a)(2).” Cheminova America Corp. v. Corker, 779 So. 2d 1175,1180 (Ala. 2000).
When the party opposing the class has engaged in some course of
conduct that affects a group of persons and gives rise to a cause of
action, one or more of the elements of that cause of action will be
common to all of the persons affected.
1 Newberg on Class Actions, § 3:10 at 273-78. That is precisely what has occurred here:
Block, through its RAL program, has engaged in a course of conduct that affected all members of
the Class, a course of conduct which Plaintiffs allege has given rise to causes of action. There
is a “common nucleus of operative facts” with respect to all Class members. Plaintiffs have
identified the following issues of law and fact which the Court finds to be common to all members
of the Class:
| a. | Whether Block acted as the agent of the Plaintiffs in transmitting the RAL applications to the lender banks. | ||
| b. | Whether Block acted as the agent of the Plaintiffs in disclosing to the lender banks information supplied by Plaintiffs to Block, including Plaintiffs’ tax returns and the information contained therein. | ||
| c. | Whether Block used the information supplied to it by Plaintiffs and disclosed by Block to the lender banks for the purpose of its own financial gain. | ||
| d. | Whether Block received license fees because of an agency relationship with the Plaintiffs. | ||
| e. | Whether Block received profits from its participation in the pooling agreements with the lender banks. | ||
| f. | Whether Block owed a fiduciary duty to Plaintiffs to disclose to them that it would receive as a license fee from the lender banks part of the finance charge for the RALs that Plaintiffs |
8
| paid to the lender banks, and whether Block owed a fiduciary duty not to receive such an undisclosed license fee. |
| g. | Whether Block owed a fiduciary duty to the Plaintiffs to reveal its relationships with the lender banks, to disclose that it was receiving profits from its use of the information supplied to it by Plaintiffs and disclosed by Block to the lender banks, and not to receive undisclosed profits from the lender banks. | ||
| h. | Whether Block contracted with Plaintiffs not to use for its own financial gain the Information supplied by Plaintiffs to Block and disclosed by Block to the lender banks, and if so, whether Block breached that contract. | ||
| i. | Whether Block has been unjustly enriched because it received or holds money which In equity and good conscience belongs to Plaintiffs, or because Plaintiffs conferred benefits upon Block as a result of detriment suffered by Plaintiffs. |
The Court finds that Plaintiffs have proven the existence of the commonality
requirement.
C. Typicality.
The claims of the class representatives must be typical of the claims of the class.
“A representative’s claim is typical [if it] arises from the same event or practice or
course of conduct that gives rise to the claims of other class
members and ... [is] based
on the same legal theory.” Cheminova America Corp. v. Corker, 779 So. 2d at 1180-81
(alternations in original). The typicality requirement tests whether “the claims of the
named plaintiffs have the same essential characteristics as the class at large.” Id. at
1180 (internal quotation marks omitted). “Where, as here, ‘the party seeking certification
alleges that the same unlawful conduct was directed at the class representatives and the
class itself, the typicality requirement is usually met irrespective of the varying fact
patterns which underlie individual claims.” Id. (quoting Appleyard v. Wallace, 754 F.2d
955,958 (11 th Cir. 1985)).
9
"[T]ypicality of claims seeks to assure that the interests of the representative are
aligned with the common questions affecting the class.” 1 Newberg on Class Actions, §
3:13 at 319.
The Court will now apply these legal principles to the claims which Plaintiffs seek
to have certified for class treatment.
1. The Breach of Fiduciary Duty Claim.
Plaintiffs’ breach of fiduciary duty claim is based upon the following
provision contained in Plaintiffs’ 1995 (tax year 1994) RAL application:
On the date I sign this application, I hereby authorize and
request H&R Block and its affiliates to disclose to
Beneficial National Bank and its agents (“BNB”) my federal
income tax return for tax year 1994, any and all other
information contained in such tax return, all information
supplied to H&R Block, including IRS direct deposit
information, In connection with the preparation of such tax
return, and all other information contained in this form and
any Information contained in any of my prior RAL applications
which was disclosed to H&R Block. I authorize and consent to
the disclosure of all the foregoing information for the
purpose of enabling BNB to determine whether or not to make a
Refund Anticipation Loan (“RAL”) to me in response to my
application for such loan which is a part of this form.... H&R
Block may not use or disclose such tax return information or
such other information for any purpose (not otherwise
permitted under Treas. Reg. Sec. 301.7216-2) other than as
stated herein, except that BNB or its affiliates may use such
Information to conduct system testing of the RAL program to
update such system and keep it operational.
The Class Definitions reflect this provision of the Plaintiffs’ RAL application.
Therefore, if an Alabama resident who obtained a RAL during the Class Periods did not
use a RAL application with the above or substantially similar language, that person is
not a member of the Class. The RAL applications introduced into evidence indicate that
in
10
Alabama for calendar years 1989 through 1996, only one lending institution, for
only one year, did not use this RAL provision or a materially identical
provision.
Plaintiffs’ breach of fiduciary duty claim is based upon agency. The test
for determining whether an agency relationship exists is whether the alleged
principal reserved a right of control over the manner of the alleged agent’s
performance. Thrash v. Credit Acceptance Corp., 821 So. 2d 968, 972 (Ala. 2001).
An agent engaged for a specific purpose is a special agent for that limited
purpose only. City Stores Company v. Williams, 252 So. 2d 45, 51 (Ala. 1971).
Plaintiffs allege that the above-quoted language of the RAL application made
Block the special agent of its customers, for the limited purpose of transmitting
their tax return information (and other information acquired by Block from them)
to the lending institution.
The RAL application authorizes Block to disclose its customers’ tax and
other information to the lending institution. This disclosure is for a specific
purpose: “for the purpose of enabling [the lending institution] to determine
whether or not to make a Refund Anticipation Loan.” The RAL application further
provides: “H&R Block may not use or disclose such tax return information or such
other information for any purpose (not
otherwise permitted under Treas. Reg. Sec. 301.7216-2) other than as
stated herein....”
Neither the RAL application nor the referenced treasury regulation permit
Block to use its customers’ information for its own financial gain.
Block acts on behalf of its customer in transmitting the customer’s information to the
lending institution. The disclosure of information is made for the specific purpose of
enabling the lending institution to decide whether to extend a RAL to the customer. The
11
RAL application specifically prohibits Block from using or disclosing the information for any
other purpose.
Plaintiffs allege that this restriction upon Block’s use of the customer’s tax and other
information, contained in the RAL application which is signed by the customer, gives the customer
the right of control over the manner in which Block uses the information. As such, Plaintiffs
allege, the test for an agency relationship is satisfied. Specifically, Plaintiffs allege that this
restriction makes Block the special agent of its customer for the limited purpose of transmitting
the customer’s information to the lending institution.
It is well established that an agent owes a fiduciary duty to his principal within the line
and scope of the agency. Miller v. Jackson Hospital and Clinic, 776 So. 2d 122,123 (Ala. 2000).
The fiduciary obligation includes disclosure of all material facts within the subject matter of
the agency, id., and prohibits an agent from profiting from the subject matter of the agency
without the principal’s consent. Gardner v. Cumis Ins. Society, Inc., 582 So. 2d 1094,1096 (Ala.
1991). Plaintiffs allege that Block breached its fiduciary duty to the class members when it used
or disclosed their tax information, a matter within the scope of Block’s special agency, to the
lending institutions for Block’s own profit, to obtain license fees and an ownership interest in
the RALs, and when Block failed to disclose these profits and its true relationship with the
lending institutions to the class members.
In the prior appeal of this case, the Alabama Supreme Court reversed the denial of class
certification by this Court’s predecessor judge, on the ground that the Court improperly
considered the merits of Plaintiffs’ breach of fiduciary duty claim “by adjudicating, during the
class certification hearing, the issue whether the loan documents and the restrictions contained
in those documents created an agency relationship.” Mitchell
12
v.
H&R Block, Inc., 783 So. 2d 812, 815 (Ala. 2000). The Alabama Supreme Court
further held:
[T]he contractual-agency issue requires the trial court to
do nothing more than look to see if a uniform document
existed and whether it was used uniformly by H&R Block.
Id. at 816. Plaintiffs’ breach of fiduciary duty claim is based entirely upon what
the Alabama Supreme Court termed “the contractual-agency issue.” In this regard, and
pursuant to the Alabama Supreme Court’s instruction, this Court finds that a uniform
document existed and that it was used uniformly by H&R Block. As noted, with the
exception of the RAL application used by one lending institution for one year during the
calendar years 1989 through 1996, the RAL applications used by H&R Block and its
franchisee offices in the State of Alabama contained the provision quoted above, or a
provision which was identical in all material respects. Thus, the Named Plaintiffs’
breach of fiduciary duty claim is typical of the Class members’ breach of fiduciary duty
claim.
Consistent with the Alabama Supreme Court’s admonition not to adjudicate the merits
of a claim in determining the propriety of class certification, the Court specifically
does not reach the issue of whether this provision in the RAL applications created a
special-agency relationship between Block and his customers, which would correspondingly
give rise to a fiduciary duty on Block’s part within the line and scope of that agency.
The Court does find, however, that the existence of a special-agency relationship and
corresponding fiduciary duty can be determined based solely upon the uniform provision
used by Block in its RAL applications on a class-wide basis. Either the language of this
provision creates a special-agency relationship, or it does not. In this regard, it is
important to note the manner in which the Plaintiffs have framed their claim. Plaintiffs
do
13
not rely on anything outside the RAL application as having created an agency relationship and
fiduciary duty. Plaintiffs’ claim is based solely upon the language of the RAL application
itself.
2. The Unjust Enrichment Claim.
A claim for unjust enrichment lies where the defendant holds money which in equity
and good conscience belongs to the plaintiff, Dickinson v. Cosmos Broadcasting Co., 782 So. 2d
260, 266 (Ala. 2000), or where the plaintiff, to his detriment, has conferred a benefit upon
the defendant. Opelika Production Credit Ass’n., Inc. v. Lamb, 361 So. 2d 95, 99 (Ala, 1978).
Plaintiffs’ unjust enrichment claim is entirely derivative of their breach of fiduciary duty
claim. This is abundantly clear from the allegations of Plaintiffs’ Complaint as last amended.
Stated differently, the unjust enrichment claim will rise or fall based upon the same proof as
Plaintiffs’ breach of fiduciary duty claim. Thus, it can be determined based upon the same
provision uniformly used by Block in its RAL applications on a classwide basis.
As such, Plaintiffs’ unjust enrichment claim is typical of the Class Members’ unjust
enrichment claims. In making this determination, the Court does not consider the merits of
the unjust enrichment claim.
3. The Breach of Contract Claim.
Plaintiffs’ breach of contract claim is also based entirely upon the same uniform
language contained in the RAL applications as the breach of fiduciary duty claim. Plaintiffs’
claim is based upon an allegation of a unilateral contract.
[A] unilateral contract results from an exchange of a promise for
an act; a bilateral contract results from an exchange of
promises. [Citations omitted]. Thus, in a unilateral contract,
14
there is no bargaining process or exchange of promises by
parties as in a bilateral contract. [Citation omitted].
[O]nly one
party makes an offer (or promise) which invites performance by
another, and performance constitutes both acceptance of that offer
and consideration. [Citation omitted]. Because a unilateral contract
is one in which no promisor receives promise as consideration for
his promise, only one party is bound.
SouthTrust Bank v. Williams, 775 So. 2d 184,188 (Ala. 2000) (alterations in original; internal
quotation marks deleted). Plaintiffs allege that Block promised (or offered) in the above-quoted
provision of the RAL application to transmit its customers’ tax (and other) information to a
lending institution, for the purpose of enabling a lender to determine whether to extend a RAL, and
further promised not to use the customer’s tax information for any other purpose. Plaintiffs allege
that this promise (or offer) invited performance by the customer: execution of the RAL application
authorizing the release of the customer’s tax information to the lending institution. Plaintiffs
further allege that such a performance by the customer constituted both acceptance of Block’s offer
and consideration. Plaintiffs contend that Block breached the alleged unilateral contract when it
used its customers’ tax information to generate profit for itself, as discussed above — a purpose
allegedly prohibited by the unilateral contract.
The Court finds that because the Plaintiffs allege the existence of a contract which is
unilateral, as opposed to bilateral (a promise for a promise), the merits of this claim can be
resolved solely by reference to the uniform provision quoted above in the RAL applications
uniformly used by Block. As noted above, the Alabama Supreme Court has held that there is no
bargaining process between the parties to a unilateral contract. As such, under the Plaintiffs’
breach of unilateral contract theory, the Court will not need to
15
examine the state of mind of the individual Class members. Therefore, the named
Plaintiffs’ breach of contract claims are typical of the breach of contract claims of the
Class members.
The Court does not address the merits of the Plaintiffs’ breach of contract claim at
this stage of the proceedings.
4. Block’s Challenges to Typicality.
Block challenges Plaintiffs’ proof of the typicality requirement in several respects.
Initially, the Court notes that Block has advanced several arguments which are not directed
to any specific class certification factor, but rather, are in actuality merits arguments.
The Court will discuss these arguments now.
Block contended at oral argument that it did not receive license fees from its
franchisee offices, as opposed to Block-owned offices. If true, this would significantly
reduce the size of the Class, since the vast majority of Block’s offices in Alabama are
franchisee-owned. However, whether Block received license fees from its franchisee offices
is a merits issue, not a certification issue, and hence is not germane at this stage of
the proceedings. Whether Plaintiffs can actually prove their claims against Block, one
element of which is whether Block received license fees for its RALs during the Class
Periods, is not an issue during class certification. Pursuant to
Ala, Code 1975 § 6-5-641
(c), all discovery directed to the merits of Plaintiffs’ claims has been stayed. Thus,
whether Block received license fees from its franchisee offices has not been fully
developed, and is not ripe for adjudication in any event. Moreover, the Court notes that
the deposition of
16
Harry W. Buckley (Plaintiffs’ Supplemental Notice of Filing, Exh. 9, p. 135) indicates that Block
did receive license fees from its franchisee-owned offices.6
Similarly, whether Block received any license fees before 1992 is a merits issue, and has not
been fully developed because merits discovery has been stayed.
Block also contends that it, as opposed to its franchisees, did not participate in pooling
agreements in Alabama during the Class Period. Whether or not Block profited directly from the
pooling agreements is a merits question. Moreover, even if only Block’s franchisees directly
participated in pooling agreements, that does not necessarily mean that Block did not ultimately
profit from those pooling agreements, which could constitute a breach of the fiduciary duty alleged
by Plaintiffs, Again, this is a merits question, which has not been fully developed.
Block also contends that the breach of contract claim is defective because Plaintiffs’
Complaint supposedly shows that Plaintiffs have not been damaged in this respect. This contention
is based upon the following: with respect to their breach of contract claim, Plaintiffs allege
that had Block not received license fees from lending institutions, Plaintiffs would have paid a
correspondingly lower finance charge to the lending institutions for their RALs. (Plaintiffs’
Fourth Amended Complaint, ¶ 37).7 Plaintiffs stipulate that the lending institutions did
not charge any excessive or unlawful interest rates, finance charges or loan
| 6 | Defendants’ Motion to Exclude Plaintiffs’ Supplemental Exhibit 9 is denied for the reasons set out in Plaintiffs’ Response thereto. | |
| 7 | In Block’s original brief opposing certification, it alleges, in footnote 11, that the license fee did not affect the cost of the finance charge to the RAL customer. There is no evidence to support this conclusory assertion. Moreover, whether the inclusion of the license fee increased the total finance charge to the customer is a merits question. | |
17
fees, and further allege that the interest rates, finance charges, and loan fees charged by the
lending institutions “are not an element of plaintiffs’ causes of actions set out herein.”
(Plaintiffs’ Fourth Amended Complaint, ¶ 11). Thus, says Block, if the finance charges are not an
element of the breach of contract claim, Plaintiffs have no damages. Block has misread Plaintiffs’
Complaint. Plaintiffs allege that license fee paid to Block constitutes a portion of the finance
charge paid by Plaintiffs to the lending institutions. Simply because the lending institutions’
finance charges were not excessive does not mean that they would not have been less had there been
no license fee included as a component. Plaintiffs correctly allege that the finance charges
charged by the lending institutions are not an element of their claim. This is because Plaintiffs
do not attack the total amount of the finance charge actually charged by the lending institutions;
rather, Plaintiffs seek to recover the license fee component of the finance charge from Block, for
alleged breach of contract.8
Proceeding to Block’s direct attacks upon the typicality requirement, Block contends that the
named Plaintiffs are not members of the Class they seek to represent. Block bases this contention
upon the following: the Fourth Amended Class Action Complaint alleges that the class members
obtained a loan from banks, for which they paid a finance charge, and alleges that Block should not
have received part of the bank’s finance charge as a “kickback,” while the Mitchells believe that
they received their refund payment directly from Block, and believe that they paid Block a charge
for this service.
First, Block’s argument is factually incorrect. Mrs. Mitchell testified in her deposition
that although she misunderstood the nature of the RAL transaction when it occurred, at the
| 8 | Block’s Motion to Dismiss the contract claim is denied without prejudice. Block can reassert this motion during the merits phase of this case, if it chooses to do so. | |
18
time of her deposition she understood that she had received a loan from a bank, and further
testified that she was complaining about a secret “kickback” to Block. Although Mr. Mitchell
displayed confusion in his deposition, both he and Mrs. Mitchell have since filed affidavits in
which they testify that they have now learned (after their depositions)9 that they
received a loan from a bank, that Block received a secret “kickback” and otherwise profited from
the transaction, and that they are asserting claims on behalf of the Class for this alleged
self-profiteering.
Second, Block’s argument is immaterial. What Plaintiffs and the Class members “thought” is not
a fact of consequence to the Plaintiffs’ claims as they have been framed and as they are based on
the uniform Block RAL documents. “How the parties characterize the relationship is of no
consequence; it is the facts of the relationship that control.” Thrash v. Credit Acceptance Corp.,
821 So. 2d at 972 (discussing agency). Moreover, “[i]f relations exist which will constitute an
agency, it will be an agency whether the parties understood the exact nature of the relation or
not.” Storey v. Corkren, 156 So. 2d 484,487 (Ala. 1963). If a limited-purpose agency relationship
existed between Block and Its customers, Block’s reaping of a profit from the subject matter of its
agency was illegal as a matter of law. Miller v. Jackson Hospital and Clinic, 776 So. 2d at 124
(“acts of an agent which tend to violate [his] fiduciary obligation are prima facie voidable, and
are considered, in law, as ‘frauds upon confidence bestowed’”); Gardner v. Cumis Insurance Society,
Inc., 582 So. 2d at 1096 (“[An] agent may not
[t]raffic with the subject-matter of his
| 9 | The Court has considered the Plaintiffs’ affidavits because the affidavits explain any inconsistency between the testimony contained therein and the Plaintiffs’ depositions: the Plaintiffs were apprised of certain facts after their depositions had taken place. | |
19
agency, without the consent of his principal, so as to reap the profit for himself.”) (alterations
in original & citation omitted); Sevigny v. New South Federal Savings & Loan Assoc., 586 So. 2d
884,887 (Ala. 1991) (“An agent is not permitted to occupy a position that would allow her to
profit as a result of that agency relationship.”). Thus, the mental operations of the Plaintiffs
and the class members, as to what they may have thought the RAL transactions were about, are
irrelevant. If there was an agency relationship based upon the uniform Block RAL documents, and
Block profited from the subject matter of its agency, those profits were illegally obtained.
Similarly, if the unambiguous language of the RAL application created a unilateral contract
whereby Block promised not to use its customers’ information for its own financial gain, it is
immaterial what the Mitchells (or the Class members) may have subjectively thought about the
nature of the transaction.10
Block also contends that the named Plaintiffs fail the typicality test because of a
disclosure contained on the back of one of their RAL checks. On the back of the named Plaintiffs’
1994 (tax year 1993) RAL check is the statement that the customer’s electronic filer (Block) “may”
receive a portion of the bank’s finance charge.11 Thus, says Block, the
| 10 | The law of contracts is based upon the objective, not subjective, intent of the parties, as derived from the contract itself, where the language is unambiguous. Murray v. Alfab, Inc., 601 So. 2d 878, 886 (Ala. 1992). “‘Agreement consists of mutual expressions; it does not consist of harmonious intentions or states of mind.... [One] may be ‘bound’ by a contract in ways that he did not intend, foresee, or understand. The juristic effect (the resulting legal relations) of a man’s expressions in word or act may be very different from what he supposed it would be.” Lilley v. Gonzales, 417 So. 2d 161,163 (Ala. 1982) (quoting A. Corbin, Corbin on Contracts, § 9). | |
| 11 | The claims for which the Named Plaintiffs seek class certification are based upon their 1995 (tax year 1994) RAL transaction. | |
20
named Plaintiffs cannot represent the class members on their claim that the license fee was
not disclosed.12
This contention is erroneous because the purported disclosure on the back of the check came
too late. Block’s duty as set out in the RAL applications was to transmit its customers’
information to the lender banks. If Block owed a fiduciary duty because of a special agency,
Block’s obligation was to disclose its profits before the customer signed the RAL application, or
at least before Block accepted its appointment as a special agent by transmitting the customer’s
information to the lender bank. Because of Block’s pre-existing agreement with the lender banks for
the receipt of license fees, its after-the-fact disclosure of its profits, after it had completed
its business on behalf of its alleged principal, and allegedly used the customer’s tax information
for its own profit, was meaningless.13 For Identical reasons, Plaintiffs’ breach of
contract claim is unaffected by the tardy disclosure.
Moreover, the purported disclosure was ineffective for another reason. The disclosure recites
that the customer’s electronic filer (Block) “may” receive a portion of the lender bank’s finance
charge. However, in actuality it was a certainty that the electronic
| 12 | Block also contends that this disclosure effectively moots the class members’ claims for 1994 (tax year 1993), because all the RAL checks for that year (according to Block) contained this disclosure. This contention is incorrect for the same reasons that Block’s typicality argument is without merit, as discussed herein. | |
| 13 | Block contends that the RAL transaction is not complete until the customer endorses the RAL check, because until that moment, the customer is free to cancel the transaction. (Block’s Post-Hearing Brief, p. 11 n. 6). This is true insofar as the lending institution is concerned. However, if a fiduciary duty existed, Block’s obligation was to disclose the license fee to its customer before Block used the customer’s tax information for its own profit — which use occurred when Block transmitted the customer’s tax information to the lender bank, because of Block’s preexisting license fee agreement with the lender banks. |
21
filer would receive a portion of the bank’s finance charge in the form of a license fee, because of
the preexisting license fee arrangements with the lender banks. “To warn that the untoward may
occur when the event is contingent is prudent; to caution that it is only possible for the
unfavorable events to happen when they have already occurred Is deceit.” Huddleston v. Herman &
MacLean, 640 F.2d 534, 544 (5th Clr, 1981), reversed on other grounds, Herman & MacLean
v, Huddleston, 459 U.S. 375 (1983). Thus, the purported disclosure was ineffective for this reason
as well.14
For the foregoing reasons, the Court finds that the Plaintiffs have proven that their claims
are typical of the claims of the class members.
D. Adequacy.
The Class Representatives must fairly and adequately protect the interests of the class. The
purpose of this requirement “is to protect the legal rights of absent class members.” Kirkpatrick
v. J. C. Bradford & Co., 827 F. 2d 718, 726 (11th Cir. 1987). In Alabama, the adequacy requirement
has two elements. “The adequacy-of-representation inquiry involves questions as to whether the
plaintiffs counsel are qualified, experienced, and generally able to conduct the proposed
litigation, and as to whether the plaintiffs have interests antagonistic to those of the rest of
the class.” Ex parte Government Employees Ins. Co., 729
So. 2d at 309; accord, Cheminova, 779 So.
2d at 1181.
| 14 | Block argued in Its original brief opposing class certification that this purported disclosure put Plaintiffs and the Class members on notice for subsequent years that Block “may” receive part of the finance charge for the RAL. This argument has been abandoned because it was not raised at the certification hearing or in Block’s Post-Hearing Brief. In any event, the false disclosure which treated a certainty as a contingency was Ineffective to place Plaintiffs and the Class members on notice that Block would receive a license fee in subsequent years, Finally, a disclosure in one year does not carry over to a subsequent year when the RAL documents were silent. |
22
Here, the named Plaintiffs have no interests antagonistic to those of the class they seek to
represent. There are no internal conflicts of interest; the interests of the named Plaintiffs are
coextensive with those of the class members. Proposed counsel for the Class have substantial
experience pursuing complex litigation generally, and consumer class litigation in particular. The
adequacy requirement is satisfied.
Block has also contended in its original brief that the Mitchells are inadequate class
representatives because they supposedly do not understand the nature of their claims or the nature
of the class action mechanism, and because they are unable to fund the costs of notice to the
class. Block did not raise these issues at the certification hearing or in its Post-Hearing Brief.
Therefore, the Court deems these contentions to have been abandoned. Moreover, the Court notes
that the Plaintiffs’ affidavits on file recite that since their depositions, they have been made
aware of the nature of their claims and the nature of their fiduciary responsibilities to the
class, and that they have made arrangements with their attorneys to provide for class notice.
The Court finds that the Plaintiffs have proven that they will fairly and adequately protect
the interests of the class.
The Court now turns to the requirements of Ala.R.Civ.P. 23(b)(3).
E. Predominance.
Questions of law or fact common to the members of the class must predominate over any
questions affecting only individual members. The predominance test requires “[T]he existence of a
group which is more bound together by a mutual interest in the settlement of common questions than
it is divided by the individual members’ interest in matters peculiar to them.” Ex parte AmSouth
Bancorporation, 717 So. 2d 357,363 (Ala.
23
1998). “In deciding whether common questions of fact or law predominate, a court must examine each
plaintiffs cause of action and consider what value the resolution of the class-wide issue will
have in each class member’s underlying cause of action.” Reynolds Metals Co. v, Hill, 825 So. 2d
100, 104 (Ala. 2002) (citation omitted). Stated differently, “To predominate, common issues must
constitute a significant part of individual class members’ cases.” Cheminova, 779 So. 2d at 1181.
In the case sub judice, the Class members’ claims are all dependent upon standardized RAL
documents uniformly used by Block in a classwide manner. As such, resolution of the classwide
issues based upon these uniform documents will be dispositive of each class member’s cause of
action.
Block contends that predominance is defeated as to each of the Plaintiffs’ claims because,
Block says, the pertinent language of the RAL application is ambiguous, and therefore, presents
individual questions of document interpretation. The Court disagrees. “An ambiguity exists where a
term is reasonably subject to more than one interpretation.” Ex parte Awtrey Realty Co., Inc., 827
So. 2d 104,107 (Ala. 2001). “The mere fact that adverse parties contend for different constructions
does not in itself force the conclusion that the disputed language is ambiguous.” Id. Objectively
viewed, the pertinent language of the RAL application is, obviously, not reasonably subject to more
than one interpretation: “H&R Block may not use or disclose such tax return information or such
other information for any purpose (not otherwise permitted under Treas. Reg. Sec. 301.7216-2) other
than as stated herein...” The Court discerns no ambiguity here. This straightforward language means
what it says.
24
Block further contends that the predominance requirement is not met because the agency issue
would require a determination of whether each individual class member reserved a right of control
over Block’s actions. Block is incorrect. As discussed, the agency issue can be determined based
solely upon the uniform language contained in the RAL applications. An examination of each class
member’s state of mind is unnecessary and irrelevant. As Block admits in its Post-Hearing Brief,
“Whether relations exist which will constitute an agency in this case depends on the relations of
the parties as they exist under their agreements.” (Block’s Post-Hearing Brief, p. 10) (quotation
marks deleted and emphasis added). The agreements in this case are uniform written documents.
Block further contends that predominance is destroyed with respect to the breach of fiduciary
duty claim because Block, as an alleged agent, must have failed to disclose a material fact. Block
has produced affidavits from some of its customers stating that the existence of the license fee
was of no consequence to them. Thus, Block reasons, predominance is destroyed because there must
be an individualized determination of whether each class member thought the undisclosed license
fee was important or not. This contention fails because, as discussed, an agent’s failure to
disclose profit reaped from the subject matter of the agency is
illegal — and therefore material — as a matter of law. Thus, the various class members’ personal beliefs about the propriety of
the license fee are irrelevant.
Block further contends that the predominance requirement is not met because the Class
includes persons who obtained RALs from Block franchisees (as the Mitchells did), as well as
persons who obtained RALs from Block-owned offices. Block points out that the franchisees are
independent entities, and that Block cannot be liable for their actions unless
25
they acted as Block’s agents. Block argues that a determination of agency would require numerous
mini-trials on whether each of the approximately 190 Block franchisees in Alabama was acting as
Block’s agent at any given time. Therefore, says Block, either predominance is completely
destroyed, or at the least, the class must be limited to persons who obtained their RALs from
Block-owned offices.
The Court disagrees. The Court finds that whether Block franchisees were acting as Block’s
agents can be determined from the RAL documents, based upon the
well-established concept of implied agency.
While the creation of an agency relationship, so far as the
principal and agent are concerned, arises from their consent
and usually as the result of a contract, it is not essential that
any actual contract exist or that compensation be expected by
the agent or agreed to by the parties. While the relationship,
in its full sense, arises out of a contractual or gratuitous
agreement between the parties,... the agency and the assent
of the parties thereto may be either express or implied...
An express agency is an actual agency created as a result of the
oral or written agreement of the parties, and an implied agency is
also an actual agency, the existence of which as a fact is proved by
deductions or inferences from the other facts and circumstances of
the particular case, including the words and conduct of the parties.
Fisher
v. Comer Plantation, Inc., 772 So. 2d 455, 465 (Ala. 2000)
(quoting 3 Am.Jur.2d Agency § 18 (1986)).
In the case sub judice, whether the various franchisees were acting as Block’s agents for the
purpose of the RAL transactions can be determined solely from the RAL applications themselves. The
following observations apply to all RAL applications for calendar years 1989 through 1996, with
the sole exception of the 1994 (tax year 1993) Mellon Bank RAL application: The RAL applications
are all replete with references to “H&R
26
Block” and “H&R Block, Inc.” For several years, the RAL applications state that the customer’s
signature must be witnessed by “H&R Block.” As discussed, the RAL applications all provide that
“H&R Block” can only use the customer’s
information for specified purposes, not including for Its
own financial gain. Significantly, all the RAL applications also authorize “H&R Block” to disclose
the customer’s tax information to the lender banks. Just as significantly, the RAL applications
over this period of years all authorize “H&R Block” to transmit the customer’s loan request to the
lender bank.
This is evidence of a longstanding pattern of conduct from which agency or the absence
thereof should be determinable on a classwide basis pursuant to the implied agency principle, with
respect to all Block franchisees, solely from the language of the RAL documents.
At the certification hearing, Block challenged predominance by raising the issue of
arbitration. However, Block’s counsel specifically conceded that arbitration “is not a big issue”
at this juncture. That is an accurate characterization of the arbitration issue.
The arbitration issue arises because beginning in calendar year 1997 (tax year 1996), all
Block customers signed retroactive arbitration agreements.15 Thus, Block can raise
arbitration as an issue with respect to any Class members who, after the Class Periods, did further
business with Block. First, this is a merits issue. Second, if Block prevails on an arbitration
defense, it will be a simple matter to identify those Class members who did business with Block
after the expiration of the Class Period and signed retroactive arbitration agreements. Block
possesses the names, dates of birth, and social security
| 15 | The Class Periods end with the calendar year 1996 (tax year 1995), before Block began using arbitration agreements. |
27
numbers of all of its customers for any given year; this information is contained on the RAL
applications. A computer can eliminate from the Class all Class members who did subsequent business
with Block (and thereby signed an arbitration agreement) in very short order. The Court notes that
Block has not raised arbitration in any manner other than with respect to the predominance
requirement.
The Court finds that Plaintiffs have proven that questions of law or fact common to the
members of the Class predominate over any questions affecting only individual members.
F. Superiority.
There are four factors pertinent to this criterion.
The interest of Class members in individually controlling the prosecution of separate actions
against Block is nonexistent because most or all of the Class members have damage claims that are
uneconomical to pursue individually. “[O]ne of the primary functions of the class suit is to
provide a device for vindicating claims which, taken individually, are too small to justify legal
action but which are of significant size if taken as a group.” Brady v. LAC, Inc., 72 F.R.D. 22,28
(S.D.N.Y. 1976).
It is clearly desirable to concentrate the litigation of these claims in one forum, as
opposed to litigating the thousands of statewide Class members’ claims on an individual,
repetitive basis.
Management of the action should not pose any difficulty. As discussed, this action is based
upon written documents, and uniform provisions contained therein, which were used in a uniform
manner. Block is in possession of the social security numbers and addresses of its customers, and
has detailed information concerning past class members,
28
so that identification and notification of class members and distribution of benefits to them
should pose no difficulty. Calculation of damages on a classwide basis will pose no manageability
problems. Plaintiffs have proffered expert testimony that damages can readily be calculated on a
classwide basis. With respect to the license fee, the only variable is that the amount of the
license fee varied from year to year, and the amount of the license fee in a given year is known.
Information in Block’s possession will reflect which Alabamians purchased RALs in a given year.
With respect to the pooling agreements, Plaintiffs’ expert has testified that he can determine the
amount of profit realized by Block from each Alabama RAL customer based upon an examination of
books and records. Plaintiffs’ expert opines that all damages determinations can be made through
simple arithmatical calculations based upon generally accepted accounting principles.
The final superiority factor is the pendency of other litigation. Neither the Court nor the
parties are aware of any individual litigation concerning this controversy already commenced by
members of the class. A national class action involving Block’s RAL program has been commenced in
the United States District Court for the Northern District of Illinois. A settlement was reached
and approved, and objectors appealed. On appeal, the United States Court of Appeals for the Seventh
Circuit remanded the case for a redetermination of the settlement’s fairness and adequacy before a
different district judge. Reynolds v. Beneficial National Bank, 288 F.3d 277 (7th Cir.
2002). On remand, the federal district court rejected the settlement, and disqualified the
attorneys representing the settlement class, on the ground that they were inadequate
representatives. Reynolds v. Beneficial National Bank, 2003 WL 1877416 (N.D. III.). Among other
things, the district court found that formal discovery undertaken by settlement class counsel was
29
“nonexistent.” Id. at *5, *7. Thus, the national class action appears to be back at square one.
With the national class action in this posture, the Court finds that this Alabama-only class
action is a superior vehicle for the fair and efficient adjudication of the controversy in
Alabama.
Therefore, the Court finds that the Plaintiffs have proven that the instant class action is
superior to other available methods for the fair and efficient adjudication of the controversy.
III. CONCLUSION
Based upon the foregoing, the Court finds, after a rigorous analysis, that the Plaintiffs have
carried their burden of proving the requisites for maintaining this action as a class action as set
out in Ala.R.Civ.P. 23(a) and 23(b)(3). Accordingly, the Court certifies Plaintiffs’ claims for
breach of fiduciary duty, unjust enrichment and breach of contract as a class action pursuant to
Ala.R.Civ.P. 23(a) and 23(b)(3). The Court adopts the Class and Class Periods set out hereinabove
in the Class Definition.
The Court notes that class certification is inherently conditional, and that as the case
proceeds, this certification order can be vacated, modified, or further subclasses carved out, as
may be appropriate,
The Court appoints as Lead Class Counsel, Steven A. Martino, W. Lloyd Copeland, and Taylor,
Martino & Hedge, P.C.. The Court appoints as Class Counsel, Michael B. Hyman, Much, Shelist,
Freed, Denenberg, Ament & Rubenstein, P.C., Steven E. Angstreich, Levy, Angstreich, Finney,
Baldante, Rubenstein & Coren, P.C.
The Court is aware that Block has the right to appeal this Order within 42 days pursuant to
Ala, Code 1975 § 6-5-642. If Block does not appeal, Lead Class Counsel are
30
directed to propose a Class Notice Plan within 15 days from the expiration of the 42 day
appeal period. If Block does appeal, and this Order is affirmed, Lead Class Counsel are directed
to propose a Class Notice Plan within 15 days after the issuance of the Alabama Supreme Court’s
certificate of judgment.
DONE
this 11 day of July , 2003.
| /s/ HERMAN Y. THOMAS | ||
| HERMAN Y. THOMAS | ||
| Circuit Judge |
31
C
JOYCE A. GREEN, on behalf of herself and |
: | IN THE | ||
all other persons similarly situated |
: | |||
| : | CIRCUIT COURT | |||
Plaintiff, |
: | |||
| : | FOR | |||
vs. |
: | |||
| : | BALTIMORE CITY | |||
H&R BLOCK, INC., et al, |
: | |||
Defendants |
: | Case No. 97195023/CC4111 |
ORDER MODIFYING THE CLASS DEFINITION
UPON CONSIDERATION of the Defendants’ Motion to Modify the Class Definition,
the Plaintiff’s Response, and oral argument of the parties, it
is this
10th day of July,
2002, by the
Circuit Court for Baltimore City
ORDERED that the definition of the certified class is hereby modified to read as
follows:
All persons whose income tax forms were prepared at any H&R Block
office or facility located in the State of Maryland who have participated in
H&R Block’s Rapid Refund™ Program by obtaining a Refund Anticipation Loan
(“RAL”) at any time during the period from January 1, 1992 to May 19, 2000
(the “Class”), excluding those persons who signed a RAL application
containing an arbitration clause for any of the years 1997,1998 1999 or
2000.
MARCELLA
A. HOLLAND
JUDGE
(STAMP)
JUDGE
(STAMP)
cc:
|
N. Louise Ellingsworth, Esquire | |
| Louis J. Ebert, Esquire | ||
| Steven E. Angstreich, Esquire | ||
| Charles J. Piven, Esquire |
| /s/ FRANK M. CONAWAY, CLERK | ||||
| (SEAL) |
JOYCE A. GREEN |
* | IN THE | ||
Plaintiff |
* | CIRCUIT COURT | ||
v. |
* | FOR | ||
H & R BLOCK, INC., ETAL |
* | BALTIMORE CITY | ||
Defendants |
* | CASE NO. 97195023/CC411 |
***********************************************************************************************************
MEMORANDUM OPINION AND ORDER
This action was initiated by Plaintiff Joyce A. Green individually, and on behalf of
all persons whose income tax forms were prepared at any H & R Block office or facility located in
the State of Maryland who had participated in H & R Block’s Rapid Refund Program by obtaining a
Refund Anticipation Loan (“RAL”) during the time period January 1,1992 to the present. The
Plaintiff has sued H & R Block, Inc., H & R Block Eastern Tax Services, Inc., H & R Block Tax
Services, Inc., and Block Financial Corporation (hereinafter referred to collectively as “Block”),
alleging deceptive and unfair practices, breach of fiduciary duty, and fraudulent concealment in
connection with the Refund Anticipation Loan (“RAL”) program.
The Plaintiff in her Complaint and various pleadings has detailed the process that a person
goes through to receive an RAL. After a taxpayer has his income tax form prepared by H & R Block,
he may elect to apply to a lender participating with Block to receive the refund amount, or a
portion of the refund, if it exceeds a certain amount, in the form of a loan. The taxpayer must pay
another charge for the loan, in addition to the tax preparation fee and the electronic filing fee,
which are also deducted from the loan, and ultimately paid from the taxpayer’s actual refund. Along
with these is a finance charge which the Plaintiff alleges may reach $125. The loan proceeds are
generally made available to the taxpayer approximately two
to five days after the return is filed in the form of a check from Block which the taxpayer can
pick up at the Block office. The IRS is directed to electronically deposit the actual refund
directly with the lender bank at which time the bank deposits the proceeds into an account opened
in the taxpayer’s name and uses that account to repay the loan. The Plaintiff alleges that she is
one of thousands of Maryland consumers that have used this RAL procedure.
Plaintiff alleges that the lender bank pays Block certain fees, or “kickbacks” for every RAL
that Block solicits or procures. Plaintiff alleges these fees are unauthorized and constitute a
conflict of interest, and violate Block’s fiduciary duty to its taxpayer clients. Plaintiff also
alleges that Block advertises the RAL, along with its companion program, Rapid Refund, in such a
manner that makes customers believe they are receiving a refund, not a loan. Plaintiff has in its
pleadings noted various advertisements of the Rapid Refund Program which, in sum, always asks the
question, “Why wait for your tax refund, when you can get your money fast?” Plaintiff asserts that
the persons targeted by Block for these RALs are generally lower income, financially
unsophisticated persons who could not seek independent accountants, or lawyers, to help understand
what the RAL program really was designed to do. They therefore, expect to get their money within
two days and do believe that it is a refund as opposed to a loan against their refund. It is
exasperated by the fact that the Rapid Refund Program is advertised with the RAL program, and never
is the RAL program advertised alone. The Plaintiff also points out that Block receives another fee,
or kickback, if the RAL customer cashes the check at a Sears store.
According to the Amended Complaint, once a taxpayer comes into an H & R Block office, Block
employees are instructed to discuss RALs with any customer who qualifies, regardless of whether the
customer expresses any interest in the loan, or the so called “two day refund.” The
2
written forms also do not delineate the fees, or the true cost of the RAL, leaving the customers to
learn their actual interest rate when they receive their check, The complaint also notes that the
terms of the RAL agreement are not negotiable and that they are set
by the lending bank with
Block’s input.
The Plaintiff alleges she participated in the H & R Block Rapid Refund Program in tax years
1991 through 1994, receiving RAL’s in 1992 through 1995. She alleges she has been damaged by
participating in the Rapid Refund Program, and paying the exorbitant fees; that she has been
victimized by her agents/fiduciaries’ undisclosed earning and by the violation of Block’s fiduciary
duty owed to her as their customer.
The Plaintiff alleges she is not the lone victim of these unfair and deceptive tactics of
Block and therefore, has filed a Motion for Class Certification pursuant to Rule 2-23l(a) and (b)
(l)(b)(3) of the Maryland Rules of Procedure. The Plaintiff seeks to represent a class defined as
“all persons whose income tax forms were prepared at any H & R Block office, or facility located in
the State of Maryland, who have participated in H & R Block’s Rapid Refund Program by obtaining a
Refund Anticipation Loan (“RAL”) at any time during the period from January 1, 1992 to the
present,” Various pleadings have been filed in this case, and Motions to Dismiss the Amended
Complaint were heard on May 15,2000 and were denied by this Court in a separate Opinion and Order
filed simultaneously with this Opinion and Order. Therefore, the named Defendants remain as H & R
Block, Inc., H & R Block Eastern Tax Services, Inc., H & R Block Tax Services, Inc., and Block
Financial Corporation. All Defendants have filed responses in opposition to the Motion for Class
Certification; and a hearing on the motion was held before this Court on May 15, 2000. Since the
Maryland Rules are very specific about the factors to be
3
considered in granting class certification, the Court will address the requirements under
those Rules by the factors enumerated in the Rule in that order.
| A. | Rule 2-231(a) | ||
| Rule 2-23l(a) provides as follows; One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. |
1. Numerosity
As
the Court in Albertini v. Pete, Marwick, Main & Co., Case No.
90087031/CL111170 (Cir. Ct. Balto. City, Md., July 10,1992), correctly stated there is very little
appellate authority from the Maryland Courts providing guidance as to the criteria for
certification. However, in looking at the Federal Courts and other jurisdictions, the proper test
under this prong is whether the class is sufficiently numerous as to make joinder of all members
impracticable. Albertini also noted that a class of as few as twenty-five or thirty members
raises the presumption that joinder would be impracticable.
In the instant case, Plaintiff is requesting a certification of a class which could amount, by
the Defendant’s own records provided at prior hearings, to thousands of Maryland residents. In
Defendant’s Answer to the Plaintiffs Complaint, it noted that
Block is the largest tax preparation
in the United States, responsible for preparing between ten and twelve percent of all tax returns
filed with the Internal Revenue Service. In the Defendant’s Memorandum in Opposition to the Motion
for Class Certification, Defendant skipped the first prong of “numerosity” altogether, merely
stating in a footnote that they stipulate that the proposed class presently meets the
4
numerosity requirement, and then proceeding to discuss nationwide settlements involving RALs in
which Block has entered into in other parts of the country. With that in mind, the Court finds no
reason to further discuss this first prong and finds that the Plaintiff has met its burden on
numerosity.
2. Commonality
The
second prong of Rule 2-231 (a) mandates that there be questions of low or
fact common to the class. This requirement is noted for its ability to be easily satisfied.
There is a strain of cases in favor of the proposition that where a proposed class action
stems from a comprehensive scheme or standardized “sales presentation” that involves uniform,
publicly distributed documents, or repetitive, uniform oral representations, or omitted material
facts, class certification has been found proper and warranted. Sewell v. Sprint PCS,
L. P., Case No. 9718802/CC3879 (Cir. Ct. Balt, City, Md., June 29,1998).; Grainger v.
State Securities Life Ins. Co., 547 F.2d 303 (5th Cir. 1977).; Vasquez y. Superior
Court, 2 Cal. 3d 800 (1971).; Pruitt v. Rockefeller Center
Properties Inc., 574 N.Y.S.
2d 672 (1991).
The Judiciary recognizes the importance of class action treatment of fraud and negligent
misrepresentation claims in the context of protecting the consumer’s rights. In Vasquez,
the Court noted that “[p]rotection of unwary consumers from being duped by unscrupulous sellers is
an exigency of the utmost priority in contemporary society,” (4 Cal. 3d at 808.) and that
"[i]ndividual actions by each of the defrauded consumers is often impracticable because the amount
of individual recovery would be insufficient to justify bringing a separate action (for each of
them); thus an unscrupulous seller retains the benefits of its wrongful conduct.” (Id.)
In this particular case, Plaintiffs argue that during the class period, Defendants
took part
5
in a concerted scheme to defraud citizens of our state by releasing false and misleading
information which omitted and misrepresented material facts. The Plaintiff alleges, inter alia, in
her Complaint that common questions of law and fact exist as to the following questions:
| (1) | whether the Defendants fraudulently concealed the true nature of the Rapid Refund Program and the fees associated with RALs; | ||
| (2) | whether the Block Defendants owed to Plaintiff and the Class the fiduciary duties of one standing in a confidential relationship to another; | ||
| (3) | whether the Block Defendants owed to Plaintiff and the Class the fiduciary duties owed by an agent to its principal; | ||
| (4) | whether the Block Defendants received kickbacks from RAL lending institutions in violation of their fiduciary duties to Plaintiff and the Class; | ||
| (5) | whether the acts and practices of the Defendants were done willfully, maliciously, fraudulently and/or with actual malice; and | ||
| (6) | whether the Plaintiff and the Class have been damaged, injured or have suffered irreparable harm and, if so, the extent of such damages or injuries and/or the nature of the equitable and/or injunctive relief and statutory damages to which each member of the Class is entitled. |
The Court finds that these central issues satisfy the commonality requirement as there are
questions of law and fact common to the proposed class.
3. Typicality
The third prong of Rule 2-231 (a) requires the representative Plaintiff to present
claims that are typical of the proposed class. The class representative must show that his/her
claims “‘arise from the same event or practice or course of conduct that gives rise to the claims
of the other class members, and that the claims are based upon the same legal theory.’” Twyman
v.
6
Rockville
Housing Authority, 99 F.R.D. 314, 321 (D. Md. 1983). However, it is to be
understood that the typicality requirement does not mandate that the claims of the named
representative be “identical to” those of the other class members. This requirement is met even
though varying fact patterns support the claims or defenses of individual class members or there is
a disparity in the damages claimed by the named parties and the other members of the class.
National Constructors Ass’n v. National Electrical Contractors
Ass’n, 498 F. Supp 510, 545
(D. Md. 1980) mod., 678 F. 2d 492 (4th Cir. 1982), cert. dismissed, 463 U.S. 1234 (1983). Typicality
can also be achieved by demonstrating that the Plaintiff can “show that the issues of law or fact
he or she share in common with the class occupy the same degree of centrality to his or her claims
as to those of unnamed members.” See Weiss v. New York
Hospital, 745 F. 2d 786, 809 n. 36
(3rd Cir. 1984), cert. denied 470 U.S. 1060 (1985)
citing Donaldson v. Pillsbury, 554 F. 2d
825 (8th Cir.), cert. denied, 434 U.S. 856 (1977).
In the present case, the Plaintiff alleges that she and other members of the class were
subjected to a pattern and practice of the Defendants’ misrepresenting the nature of the Rapid
Refund Program to consumers and that Defendants took advantage of the Plaintiff and members of the
proposed class by charging exorbitant interest rates on what was a fully secured, short term, loan
for the purpose of generating substantial undisclosed fees and profit. Plaintiff also alleges that
Block acted as an agent and the Court of Appeals has made the finding that Plaintiff has alleged
sufficient facts supporting the existence of an agency relationship. Green v. H&R Block, et
al., 355 Md. 488,735 A.2d 1039 (1999) at 527. Thus, assuming an agency relationship, Defendant
Block owes a fiduciary duty to the Plaintiff and the proposed class.
The
Defendants argue that the Plaintiff’s claims lack the necessary typicality to
warrant
7
her being accepted as a viable class representative. The Defendants cite the fact that the
Plaintiff did not read her applications before signing them, she did not cash a RAL check at Sears,
she requested a RAL in at least one year, and other such fine points (Defendant’s Memorandum of Law
in Opposition to Plaintiff’s Motion for Class Certification
pp.27–28). In making such an argument
about the minute specificities of Plaintiff’s conduct as related to the conduct of the proposed
class, the Defendants essentially ignore the fact that the claims are not required to be identical.
The central issue of the class certification motion is one that deals with omitted information by a
fiduciary (agent) saddled with the obligation of revealing all pertinent information to its
principal. In this situation the Court cannot now ask the proposed class if they take issue with
the fact that information was knowingly omitted from their purview. The proper question is;” Was
information intentionally omitted from the knowledge of the Plaintiff and is this typical of the
proposed class as a whole?”
Class members usually are given the opportunity to opt out of the class by a particular
date, should they choose, if they take no offense to the actions of the Defendants or simply do not
want to be a part of the class. Rule 2–231 (e). The Court’s focus is on the actions taken by the
Defendants at the time the harm occurred, not whether or not the proposed class takes objection to
such actions. The Court finds that the typicality requirement has been met.
4. Adequacy of Representation
The fourth factor to be considered under Maryland Rule 2-231 (a), is whether the
representative party will fairly and adequately protect the interests of the class.
Case law notes that there are two components to be considered within this prong 1) the
interests of the Plaintiff must coincide with the other members of the class; and 2) it must appear
8
that the Plaintiff and selected counsel will vigorously prosecute the action. Disabled in
Action of Baltimore v. Bridwell, 593 F.Supp. 1241, 1245 (D.Md. 1984).
The first component, as borne out by the discussion on “Typicality,” is clearly met. This
Plaintiff’s interests are in sync with other members of the class she seeks to represent in the
action. There are no antagonistic interests. The Defendant’s claims that she is not an adequate
representative because she is not one of those customers who cashed her check at Sears or signed an
RAL containing an arbitration clause does not equate to her having antagonistic interests, merely
different and perhaps less damages as a result of any injury.
As to the second component of this prong, it is uncontradicted through pleadings and argument
that the plaintiff in this case reviewed the Complaint, discussed it with her attorneys, has had
other discussions with her attorneys, and appeared for deposition. Her testimony at deposition
demonstrates that she understands the nature of the Complaint, and the reasons she is suing H & R
Block, Inc., etal. In addition, while it is contested whether or not it meets Maryland’s law, the
Plaintiff was able on deposition to give details of her fee arrangement with her attorneys. In
addition, the Plaintiff presented a letter from counsel explaining the nature of her fee
arrangement with them for the purposes of this case. The defendants point out that the copy
presented to them and the Court is unsigned by either the counsel, or the plaintiff, and that a
thorough discussion of what expenses are paid by the counsel, or what might be expected to be paid
by the plaintiff, and any percentage arrangements, as sometimes you might find in contingency
cases, is missing. Plaintiff, however, argues that in class action suits, it is not necessary to
have such details in writing. Plaintiff’s deposition at pages
45 – 46 clearly indicates that her
understanding of the fee agreement matches the letter when she states: “The agreement
9
is that whatever the judge sees fit would be their payment, if there was any; if there
wasn’t, then there wouldn’t be any fee.” Ms. Green also conveyed she is under no obligation to pay
expenses whether she wins or loses. Also uncontradicted is that the plaintiff at deposition stated
that she was representing all Rapid Refund customers in the United States as opposed to all RAL
recipients in the State of Maryland as she pled in her Amended Complaint.
The Court finds that while the letter is scant, it does lay out the bare minimum requirements
for a fee arrangement; and that coupled with the testimony from the plaintiff indicating her
knowledge of the fee arrangement is sufficient to determine that she has, in fact, hired counsel,
and knows the fee arrangement, In addition, the plaintiff does appear to be a knowledgeable client,
understanding the gravamen of the case before her, and has followed through with filings,
pleadings, court appearances, and a deposition. The Court finds the misstatement in her deposition
with respect to how many persons she is seeking to represent in the class to be of little
consequence in the overall view of her knowledge of the case. The Plaintiff, in fact, has taken her
Complaint all the way to the Court of Appeals of Maryland after it was dismissed below and won a
reversal and remand; and has remained as the moving party as the case goes forward once again in
this Court. Her actions certainly suggest she is a knowledgeable, willing proponent of the cause,
and will be an adequate representative for the class.
With respect to the counsel she has retained, records reflect that they are well-known
attorneys in this field, and have filed numerous suits of this nature. The resumes of counsel, both
local and outside, reveal superior qualifications by noting vast experience in this type of
litigation, prior certifications won, including the one in the Albertini case before this
Court.
10
There is no question that they are knowledgeable and capable of pursuing this lawsuit, and have
thus far actively pursued Ms. Green’s cause. There is no reason to doubt that they would not
continue to provide more than adequate representation for the class.
In sum, the Court believes that the plaintiff has met her burden and will be an adequate
representative for the class.
B. Requirements Under Maryland Rule 2-231 (b)
The Plaintiff, as an additional prerequisite to class certification, under Maryland Rule
2-231, must establish one of several factors under 231 (b)(3). The Plaintiff in this case has
chosen to rely upon the predominant and superiority clauses of that Rule.
1. Predominance
“In determining whether the predominance standard is met, courts focus on the issue of
liability, and if the liability issue is common to the class, common questions are held to
predominate over individual ones.” Albertini v. Peat, Marwick, Main & Co. Case No.
9008703/CL111170, (Cir. Ct. Balt. City, Md., July 10, 1992); In Re Kirschner Medical Corp.
Securities Litigation. 139 F.R.D. 74, 80, (D. Md. 1991). It is clear that several questions
exist which align themselves perfectly with the issue of liability: whether or not Defendants’ acts activities and omissions amounted to violations of Maryland’s Consumer Protection Act (the
Consumer Protection Act), fraudulent concealment and breaches of Defendants’ fiduciary duties and
obligations; whether or not Plaintiff and the Class members were damaged by the violation of the
Consumer Protection Act; whether or not Defendants must disgorge the secret profit they realized in
breach of their duties; and whether or not declaratory relief is mandated are central questions.
However, the overall issue of this motion is whether the Defendants, while wearing
11
the hat of fiduciary (agent), intentionally omitted facts that the proposed class
(principal) had a right to be privy to. The Court of Appeals also narrowed the issue down to this
particular point:
[r]ather Green’s central allegation relates to H&R Block’s failure to disclose the ‘true
nature’ of its RAL program, in particular, the various ways it stands to benefit from the
customer’s agreement with the lending bank. The Court finds that the issue of liability is
common to the class. Green, at 526.
Defendants argue that the fraudulent omissions and negligent misrepresentations require proof
of individual reliance and thus, certification under (b) (3) is inappropriate because individual
issues of reliance will predominate over any common question of law and fact.
The court stated in Kirschner, “[i]n the event that individual issues of reliance pose
difficulties as to case management at a later stage, there are mechanisms available to effectively
litigate the reliance questions, without destroying the efficiency of class proceedings on other
issues.” Kirschner at 83. Also, as stated in Albertini, there are several other avenues
available to resolve reliance issues without sacrificing class certification (mini-hearings and
questionnaires to name a few).
Furthermore, there is case law, as Plaintiff argues (in Plaintiffs Reply Brief in Support of
Her Motion for Class Certification), that supports the idea that common misrepresentations obviates
the need to gather individual testimony as to each element of a fraud or misrepresentation claim,
especially where written misrepresentations or omissions are involved. Cope v. Metropolitan
Life Insurance Company, 82 Ohio St. 3d 426, at 430, (1998) citing Shields v. Lefta,
Inc., 888 F. Supp. 891, 893 (N.D. 111. 1995). This would seem to include individual issues of
reliance. Therefore, the Court finds that common issues predominate over any questions affecting
only individual members.
12
2. Superiority
The second prong of plaintiff’s reliability under Maryland Rule 231(b)(3) requires that
a class action be superior to other methods for the fair and efficient adjudication of the case.
The plaintiff first notes that the defendant should be estopped from objecting to the class
action because it has entertained a class action in the State of Illinois in Zawickowski, et al
v. Beneficial National Bank, et al, No. 98 (2178, N.Dist, 111., E.Dist). Defendant
distinguishes that action as a settlement only class which is allowed under Amchem Products,
Inc. v. Windsor, 521 U.S. 591, 117 S Ct. 2231 (1997), and denotes different factors are
considered for a settlement class certification, rather than a class certification for trial. The
Courts have noted that the requirements for certification settlement purposes are less stringent
“to encourage sweeping settlements of complex litigation,” Bowling v. Pfizer, 143 F.R.D.
141, 158 (S.D. Ohio 1992). The Court agrees with Defendant and, therefore, will not find that they
have waived their right of objection to the class on this basis.
As plaintiff notes, obviously, the cost of trying this claim in separate cases would be
extremely expensive to the individual customers who felt they were wronged. Evidence presented
shows that the loss to each alleged injured party would be nominal, such as five to fifteen dollars
per RAL. Faced with those types of damages, it is unlikely that one person would undertake the
expense involved in this complex litigation. And in fact, case law notes that when the amount of
money each person loses is small, then that is when class actions are most appropriate. Sewell
v. Sprint PCS, L.P., supra.
In addition, class actions have the least burdensome effect on the judicial system, as
they facilitate judicial economy and efficiency, as well as consistent judgments. A class action is
13
preferable, in that it would provide a speedier and more comprehensive determination of the
allegations at issue. It would also prevent inconsistent verdicts being entered against the
defendants, and would spare the defendants, and the Court, repetitive piecemeal litigation.
While the defendant raises claims of mini trials being necessary to resolve issues of causation and
reliance, the common questions of law and fact noted above would indicate that those issues would
really go more towards damages, as opposed to the merit of the lawsuit. It is alleged that the
failure to disclose the fee arrangement between H & R Block, Inc., and its lenders, the fact that
the monies the clients received were actually loans, and not their refunds, and that Block received
incentive, or “kickbacks” from the lending institutions, and from Sears where a lot of the checks
were cashed, would be the same for all the members of the class. The specific details of each of
their visits to the H & R Block for tax preparations, or their specific disclosure forms, would not
be relevant. The defendant relies heavily on the issue that the Court must know whether each class
member would have obtained a RAL had they known that Block were receiving a percentage of the fee,
or receiving a kickback, or receiving any part of the proceeds from the cashing of the check. They
also allege that the Court cannot assume that every member of the class was lured by the same Block
ad; however, evidence shows that the ads were all similar, especially with regards to the key
information that would make a person want to apply for the Rapid Refund RAL.
In sum, the Court finds that the members of the class are clearly identifiable and have similar
claims, and that the benefits of judicial economy, consistent judgments, as well as the saving of
trial costs for punitive class members, clearly make class action a superior remedy then individual
lawsuits.
14
C. CONCLUSION
For the reasons stated above, the Court finds that Plaintiff has satisfied the
requirements of Rule 2-231 (a) and (b)(3), and will certify the class defined by Plaintiff.
Pursuant to Rule 2-23 l(c), this determination may be altered or amended at anytime before a
decision on the merits upon further review of the Court. Additionally, the Court shall invite from
the parties a proposed order for the form of notice to be given members of the class.
15
| JOYCE A. GREEN, on behalf of herself and | : | IN THE | ||||||
| all other persons similarly situated | : | |||||||
| : | ||||||||
| : : |
CIRCUIT COURT | |||||||
| Plaintiff, | : | |||||||
| : | ||||||||
| : : |
FOR | |||||||
vs.
|
: | |||||||
| : | ||||||||
| : | BALTIMORE CITY | |||||||
| H&R BLOCK, INC., et al, | : | |||||||
| : | ||||||||
| Defendants | : | Case No. 97195023/CC4111 | ||||||
ORDER
Upon consideration of Plaintiff’s Motion for Class Certification, and any opposition
thereto, it is this 19 day of May, 2000, by the Circuit Court for
Baltimore City
ORDERED that Plaintiff’s Motion for Class Certification seeking certification of the following
class:
All persons whose income tax forms were prepared at any H&R Block office
or facility located in the State of Maryland who have participated in H&R
Block’s Rapid Refund Program by obtaining a Refund Anticipation Loan
(“RAL”) at any time during the period from January 1, 1992 to the
present.
is GRANTED.
FURTHER ORDERED, that the Class, as described above, is hereby certified pursuant to Maryland
Rule 2-231.
| /s/ MARCELLA A. HOLLAND | |||
| MARCELLA A. HOLLAND | |||
| JUDGE | |||
| (SEAL) |
[ ILLEGIBLE ]
D
IN THE CIRCUIT COURT OF KANAWHA COUNTY, WEST VIRGINIA
DEADRA D. CUMMINS,
IVAN and LADONNA BELL,
LEVON and GERAL MITCHELL,
JOYCE A. GREEN,
LYNN BECKER,
RENEA GRIFFITH
MARYANNE HOEKMAN and
JUSTIN SEVEY,
on their own behalf and on
behalf of those similarly situated,
IVAN and LADONNA BELL,
LEVON and GERAL MITCHELL,
JOYCE A. GREEN,
LYNN BECKER,
RENEA GRIFFITH
MARYANNE HOEKMAN and
JUSTIN SEVEY,
on their own behalf and on
behalf of those similarly situated,
Plaintiffs,
| v. | Civil Action No. 03-C-134 |
H & R BLOCK, INC., H & R BLOCK
TAX SERVICES, INC., H & R BLOCK
EASTERN ENTERPRISE, successor to
H & R BLOCK EASTERN TAX SERVICES, INC.,
BLOCK FINANCIAL CORPORATION,
HRB ROYALTY, INC., and
H & R BLOCK SERVICES, INC.,
TAX SERVICES, INC., H & R BLOCK
EASTERN ENTERPRISE, successor to
H & R BLOCK EASTERN TAX SERVICES, INC.,
BLOCK FINANCIAL CORPORATION,
HRB ROYALTY, INC., and
H & R BLOCK SERVICES, INC.,
Defendants.
[PROPOSED] FINAL ORDER OF JUDGMENT AND DISMISSAL
WHEREAS, the parties to this action, Plaintiffs Deadra Cummins, and Ivan and LaDonna Bell, and
Defendants H&R Block, Inc., et al., along with the parties in
three related and now consolidated actions, Mitchell v. H&R Block, Inc. et al., Case No.
CV-95-2067 (Circuit Court of Mobile City, Ala.) (the “Mitchell
Action”), Green v. H&R Block, Inc.
et al., Case No. 97195023/CC411 (Circuit Court of Baltimore City, Maryland) (the “Green Action”),
and Becker v. H&R Block, Inc., Case No. 5:04-cv-
01074-CAB (N.D. Ohio) (removed from Summit County (Ohio) Court of Common Pleas) (the “Becker
Action”) (hereinafter collectively these consolidated cases will be referred to as the Action)
have agreed, subject to Court approval, to settle this Action upon the terms and conditions set
forth in the Agreement of Settlement and the Exhibits annexed thereto (the “Settlement Agreement”),
which has been filed with the Court as an attachment to the Motion for Final Approval (the
“Motion”); and
WHEREAS, the Plaintiffs having made application, pursuant to West Virginia Rule of Civil
Procedure 23, for an order finally approving the Agreement, which sets forth the terms and
conditions for a proposed settlement of the Action and for dismissal of the Action with prejudice
upon the terms and conditions set forth therein; and
WHEREAS, the Court preliminarily approved the Settlement Agreement by a Preliminary
Approval Order dated , 2005, and Notice was given to all members of the Settlement Class
pursuant to the terms of the Preliminary Approval Order; and
WHEREAS, all defined terms contained herein shall have the same meanings as set forth in the
Settlement Agreement; and
WHEREAS, the Court has read and considered the papers filed in support of the Motion,
including the Settlement Agreement and the exhibits thereto, memoranda and arguments submitted on
behalf of the Settlement Class and the Settling Defendants, and supporting declarations. The Court
has also
2
considered any written comments filed with the Clerk of the Court by absent class members. The
Court held a hearing on , at which time the parties and all other interested persons were heard in
support of and in opposition to the proposed settlement; and
WHEREAS, based on the papers filed with the Court and the presentations made to the Court by
the parties and by other interested persons at the hearing, it appears to the Court that the
settlement set forth in the Settlement Agreement is fair, adequate, and reasonable. Accordingly,
IT IS HEREBY ORDERED THAT:
1. For purposes of this settlement only, the Court has jurisdiction over
the subject matter of the Action and personal jurisdiction over the parties and the
members of the Settlement Classes described below.
2. Pursuant to Rule 23(b)(3) of the West Virginia Rules of Civil
Procedure, the Court confirms its prior certification of the following Settlement
Classes for purposes of settlement only:
(a) State Law Class: All residents of the several jurisdictions identified in the
chart attached as Exhibit A who applied for and obtained a RAL through any medium, by any name,
advertised, marketed, offered or made by or through any lender through any office operating under
the trade name of “H&R Block” (including franchise or sub-franchise offices of any Settling
Defendant or Affiliate, or any H&R Block offices such as in Sears stores) from January 1, 2000
through December 23, 2005, and did not timely request exclusion from this class;
3
(b) West Virginia Class: All West Virginia residents who applied for
and obtained a RAL through any medium, by any name, advertised, marketed,
offered or made by or through any lender through any office operating under the
trade name of “H&R Block” (including franchise or sub-franchise offices of any
Settling Defendant or Affiliate, or any H&R Block offices such as in Sears stores)
from January 1, 1994 through December 23, 2005, who did not previously request
exclusion from the Cummins class or timely request exclusion from this class, other
than those persons who previously requested exclusion from the Cummins class,
subsequently obtained a RAL through any Settling Defendant or Affiliate in 2005,
and did not timely request exclusion from this class with respect to such 2005 RAL.
(c) Becker Class: All Ohio residents who applied for and obtained a
RAL through any medium, by any name, advertised, marketed, offered or made by
or through any lender through any office operating under the trade name of “H&R
Block” (including franchise or sub-franchise offices of any HRB Defendant or
Affiliate, as defined herein, or any H&R Block offices such as in Sears stores) from
January 1, 2000 through December 23, 2005, and did not timely request exclusion
from this class.
(d) Mitchell/Green Class: All Maryland residents who applied for and
obtained a RAL at any H&R Block office in Maryland from January 1, 1992 through
December 31, 1996 and did not thereafter apply for and obtain a RAL subject to an
arbitration provision, and all individuals who obtained a RAL from June 13, 1989
through December 31, 1996 through any “H&R Block” office in Alabama for which
4
the Settling Defendants herein received a license fee payment or portion of the finance charge, and
who did not previously request exclusion from their respective classes that were previously
certified or timely request exclusion from this class.
3. The Court confirms the appointments
of the class representatives and class counsel with respect to each Settlement Class, as follows:
(a) State Law Class: Justin Sevey, Maryanne Hoekman and Renea
Griffith are appointed class representatives; and Daniel Hume, Esq., of Kirby
Mclnerney & Squire, LLP, Ronald L. Futterman, Esq., Michael I. Behn, Esq., and
William W. Thomas, Esq., of Futterman & Howard, Chtd, Michael B. Hyman, Esq.,
and William H. London, Esq., of Much Shelist Freed Denenberg Ament &
Rubenstein, P.C., and Scott S. Segal, Esq. of The Segal Law Firm are appointed as
class counsel to the State Law Class.
(b) West Virginia Class: Deadra Cummins, Ivan Bell and LaDonna Bell
are appointed class representative and Brian A. Glasser, Esq., H. F. Salsbery, Esq.,
John Barrett, Esq., and Eric Snyder, Esq., of Bailey & Glasser, LLP are appointed
class counsel to the West Virginia Class. Brian Glasser is also appointed
Coordinating Counsel.
(c) Becker Class: Lynn Becker is appointed class representative and
John Roddy, Esq., Gary Klein, Esq., and Elizabeth Ryan, Esq., of Roddy Klein &
Ryan, Ronald Frederick, Esq. of Ronald Frederick & Associates, LLC, and Bruce L.
Freeman, Esq., Freeman & Chiartas, are appointed class counsel to the Becker
Class.
5
(d) Mitchell/Green Class: Levon and Geral Mitchell and Joyce A. Green are appointed
class representatives Steven A. Martino, Esq., Frederick T. Kuykendall III, Esq., and W. Lloyd
Copeland, Esq. of Taylor, Martino & Kuykendall, Steven E. Angstreich, Esq., Michael Coren, Esq.,
Carolyn C. Lindheim, Esq., of Levy, Angstreich, Finney, Baldante, Rubenstein and Coren, P.C.,
Charles J. Piven, Esq., of Law Offices of Charles J. Piven, PA, and Marvin W. Masters, Esq., of The
Masters Law Firm lc, are appointed class counsel to the Mitchell/Green Class.
4. With respect to each of the respective Settlement Classes, this Court confirms its
previous preliminary findings in the Preliminary Approval Order that, for settlement purposes
only, (a) the Settlement Class as defined above is so numerous that joinder of all members is
impracticable; (b) there are questions of law or fact common to the Settlement Class; (c) the
claims of the respective class representatives (the “Class Representatives”), identified in
paragraph 3 above, are typical of the claims of their respective class; (d) the Class
Representatives will fairly and adequately protect the interests of the Settlement Class; (e) the
questions of law or fact common to the members of the Settlement Class predominate over the
questions affecting only individual members, and (f) certification of the Settlement Class is
superior to other available methods for the fair and efficient adjudication of the controversy. In
the event the Settlement Agreement terminates pursuant to its terms or the certification of any
Settlement Class does not become final for any reason, the conditional certification of such
Settlement Class pursuant to this Order shall be vacated automatically and shall be null and void,
and any such Settlement
6
Class shall revert to its status immediately prior to the execution of the Settlement Agreement.
5. The Court finds that the Notice was given to members of the
Settlement Class in accordance with the Preliminary Approval Order and such
Notice by first-class mail and publication adequately informed members of the
Settlement Classes of all material elements of the proposed settlement, constituted
valid, due, and sufficient notice to all members of the Settlement Classes,
constituted the best notice practicable under the circumstances, and fully satisfied
all requirements of Rule 23(c) of the West Virginia Rules of Civil Procedure and
applicable law.
6. The persons who made timely and valid requests for exclusion are
excluded from the Settlement Classes and are not bound by this Order of Final
Judgment and Dismissal. The identities of such persons are set forth in Exhibit
B attached hereto.
7. The Settlement Agreement was arrived at as a result of arms’-length
negotiations conducted in good faith by counsel for the Parties, with the assistance
of an experienced mediator, and is supported by the Representatives of the
Settlement Classes.
8. The Action presents issues as to liability and damages as to which
there are substantial grounds for differences of opinion.
9. The Court finally approves the settlement of the Action in
accordance with the terms of the Settlement Agreement and finds that the
7
settlement is fair, reasonable, and adequate in all respects in light of the complexity, expense
and duration of litigation and the risks involved in establishing liability, damages and in
maintaining the class action through trial and appeal.
10. Payment
of cash as provided under the Settlement Agreement
constitutes fair value given in exchange for the release of the Released Claims
against the Released Parties. The Court finds that the consideration to be paid
to Settlement Class Members is well within the range of reasonableness
considering the facts and circumstances of the RAL transactions at issue, the
numerous types of claims and affirmative defenses asserted in the Action and
other RAL litigation over many years, and the potential risks and likelihood of
success of alternatively pursuing trial on the merits.
11. The Court orders the parties to the Settlement Agreement to
perform their obligations thereunder pursuant to the terms of the Settlement
Agreement.
12. The Court dismisses this Action, and the Released Claims, with
prejudice and without costs (except as otherwise provided herein and in the
Settlement Agreement) against Plaintiffs and all Settlement Class Members, and
adjudges that the Released Claims and all of the claims described in the Settlement
Agreement, Section I, Paragraphs 2 through 5 are released against the Released
Parties.
13. The Court adjudges that the Class Representatives and all
8
Settlement Class Members who receive money from the Settlement Fund under the Settlement
Agreement shall be deemed to have, fully, finally and forever released, relinquished and discharged
all Released Claims against the Released Parties, as defined by the Settlement Agreement. The Court
further adjudges that each Settlement Class Member who did not timely and validly request exclusion
from this settlement (the “Non-Opt Outs”), but for whatever reason did not submit a claim to
receive money from the Settlement Fund, shall be deemed to have fully, finally and forever released
and extinguished his or her right (if any ever existed) to adjudicate a Released Claim in any forum
other than by individual arbitration as permitted by and in accordance with the arbitration
provision of the 2005 RAL application, a copy of which is attached as Exhibit C to the Motion. In
all other respects, such Non-Opt Outs do not release any Released Claims for a period of one year
after the Effective Date, as defined in the Settlement Agreement, Section II, Paragraph 6, at which
time such Non-Opt Outs shall be deemed to have, fully, finally and forever released, relinquished
and discharged all Released Claims against the Released Parties.
14. The Court further adjudges that upon the Effective Date, each of the Released Parties and
all signatories to the Settlement Agreement shall be deemed to have fully, finally and forever
released, relinquished and discharged Plaintiffs, Class Counsel, and the Settling Defendants and
their counsel in this Action from any claims (including Unknown Claims) for abuse of process,
libel, malicious prosecution or similar claims arising out of, relating to, or in connection with
the
9
institution, prosecution, defense, assertion, or resolution of the Action, including any right
under any statute or federal law to seek counsel fees and costs.
15. Plaintiffs and Settlement Class Members are permanently barred and
enjoined from asserting, commencing, prosecuting or continuing any of the
Released Claims or any of the claims described in the Settlement Agreement,
Section I, Paragraphs 2 through 5 against the Released Parties, except in a manner
consistent with paragraph 13, supra, to the extent applicable.
16. It is in the best interests of the Parties and the Settlement Class
Members and consistent with principles of judicial economy that any dispute
between any Settlement Class member (including any dispute as to whether any
person is a Settlement Class Member) and any Released Party which in any way
relates to the applicability or scope of the Settlement Agreement or this Final Order
of Judgment and Dismissal should be presented exclusively to this Court for
resolution by this Court. Therefore, without affecting the finality of this Final Order
of Judgment and Dismissal in any way, the Court retains jurisdiction over: (a)
implementation and enforcement of the Settlement Agreement until the final
judgment contemplated hereby has become effective and each and every act
agreed to be performed by the parties hereto shall have been performed pursuant
to the Settlement Agreement; (b) any other action necessary to conclude this
settlement and to administer, effectuate, interpret and monitor compliance with the
provisions of the Settlement Agreement.
17. The Court approves of Class Counsel attorneys’ fees, costs and
10
expenses for the Cummins class in the amount of , and
for the State Law class, the Becker class,
and the Mitchell/Green class in the total amount of . These amounts shall be paid from the
Settlement Fund to Coordinating Counsel in accordance with the terms of the Settlement Agreement.
Coordinating Counsel will then distribute the money among class counsel in his discretion.
18. The Court approves the service fee payment of
$ for Class Representative Deadra
Cummins. This amount shall be paid from the Settlement Fund in accordance with the terms of
the Settlement Agreement.
19. The Court approves the service fee payment of
$ for Class Representatives Ivan and
LaDonna Bell. This amount shall be paid from the Settlement Fund in accordance with the
terms of the Settlement Agreement.
20. The Court approves the service fee payment of
$ for Class Representative Joyce Green.
This amount shall be paid from the Settlement Fund in accordance with the terms of the
Settlement Agreement.
21. The Court approves the service fee payment of
$ for Class Representatives Levon and
Geral Mitchell. This amount shall be paid from the Settlement Fund in accordance with the
terms of the Settlement Agreement.
22. The Court approves the service fee payment of
$ for Class Representative Lynn Becker.
This amount shall be paid from the Settlement Fund in accordance with the terms of the
Settlement Agreement.
23. The Court approves the service fee payment of
$ for Class
11
Representative Renea Griffith. This amount shall be paid from the Settlement Fund in
accordance with the terms of the Settlement Agreement.
24. The Court approves the service fee payment of
$ for Class Representative Maryanne
Hoekman. This amount shall be paid from the Settlement Fund in accordance with the terms of
the Settlement Agreement.
25. The Court approves the service fee payment of
$ for Class Representative Justin Sevey.
This amount shall be paid from the Settlement Fund in accordance with the terms of the
Settlement Agreement.
26. Neither this Final Order of Judgment and Dismissal nor the Settlement Agreement is an
admission or concession by any of the Settling
Defendants or their Affiliates of any fault, omission, liability, or wrongdoing. This
Final Order of Judgment and Dismissal shall not constitute a finding of either fact
or law as to the merits or the validity or invalidity of any claims in this Action or a
determination of any wrongdoing by the Settling Defendants, or a finding as to
any obligation of the Settling Defendants or their Affiliates to take any actions
agreed to be done or avoided as necessary in order to bring them into
compliance with law. The final approval of the Settlement Agreement does not
constitute any opinion, position, or determination of this Court, one way or the
other, as to the merits of the claims and defenses of the Settling Defendants or
the Settlement Class members.
27. All objections to the Settlement Agreement are overruled and denied
in all respects. The Court finds that no just reason exists for delay in entering this
12
Final Order of Judgment and Dismissal. Accordingly, the Clerk is hereby directed forthwith to
enter this Final Order of Judgment and Dismissal.
DATED:
, 2006 |
||
| Hon. Louis Bloom |
13
A
Exhibit A
Settling Jurisdictions
| 1. | Arkansas | |
| 2. | Arizona | |
| 3. | California | |
| 4. | District of Columbia | |
| 5. | Florida | |
| 6. | Illinois | |
| 7. | Indiana | |
| 8. | Massachusetts | |
| 9. | Maryland | |
| 10. | Maine | |
| 11. | Michigan | |
| 12. | Minnesota | |
| 13. | Missouri | |
| 14. | Nebraska | |
| 15. | New Hampshire | |
| 16. | Nevada | |
| 17. | Oregon | |
| 18. | Pennsylvania | |
| 19. | Tennessee | |
| 20. | Utah | |
| 21. | Virginia | |
| 22. | Washington | |
| 23. | Wisconsin. |
E
IN THE CIRCUIT COURT OF KANAWHA COUNTY, WEST VIRGINIA
DEADRA D. CUMMINS,
IVAN and LADONNA BELL,
LEVON and GERAL MITCHELL,
JOYCE A. GREEN,
LYNN BECKER,
RENEA GRIFFITH
MARYANNE HOEKMAN and
JUSTIN SEVEY,
on their own behalf and on
behalf of those similarly situated,
IVAN and LADONNA BELL,
LEVON and GERAL MITCHELL,
JOYCE A. GREEN,
LYNN BECKER,
RENEA GRIFFITH
MARYANNE HOEKMAN and
JUSTIN SEVEY,
on their own behalf and on
behalf of those similarly situated,
Plaintiffs,
| v. | Civil Action No. 03-C-134 |
H & R BLOCK, INC., H & R BLOCK
TAX SERVICES, INC., H & R BLOCK
EASTERN ENTERPRISE, successor to
H & R BLOCK EASTERN TAX SERVICES, INC.,
BLOCK FINANCIAL CORPORATION,
HRB ROYALTY, INC., and
H & R BLOCK SERVICES, INC.,
TAX SERVICES, INC., H & R BLOCK
EASTERN ENTERPRISE, successor to
H & R BLOCK EASTERN TAX SERVICES, INC.,
BLOCK FINANCIAL CORPORATION,
HRB ROYALTY, INC., and
H & R BLOCK SERVICES, INC.,
Defendants.
[PROPOSED] ORDER PRELIMINARILY APPROVING CLASS ACTION
SETTLEMENT AND PROVIDING FOR NOTICE
(“PRELIMINARY APPROVAL ORDER”)
SETTLEMENT AND PROVIDING FOR NOTICE
(“PRELIMINARY APPROVAL ORDER”)
WHEREAS, the Court has been advised that the parties to this action, Plaintiffs Deadra D.
Cummins, and Ivan and LaDonna Bell, and Defendants H&R Block, Inc., et al., along with the parties
in three related actions, Mitchell v. H&R Block, Inc. et
al., Case No. CV-95-2067 (Circuit Court of
Mobile City, Ala.) (the “Mitchell Action”), Green v. H&R Block, Inc. et al., Case No.
97195023/CC411
(Circuit Court of Baltimore City, Maryland) (the “Green Action”), and Becker v. H&R
Block, Inc., Case No. 5:04-cv-01074-CAB (N.D. Ohio) (removed from Summit
County (Ohio) Court of Common Pleas) (the “Becker Action”) (hereinafter
collectively referred to as the Settling Actions) have agreed, subject to Court approval
following notice to the Settlement Class and a hearing, to settle these actions upon the
terms and conditions set forth in the Agreement of Settlement (“Agreement”), which has been
filed with the Court as an attachment to the Motion for Preliminary Approval;
WHEREAS, the Plaintiffs having made application, pursuant to West Virginia Rule
of Civil Procedure 23, for an order preliminarily approving the settlement of the Action in
accordance with the Agreement of Settlement and the Exhibits annexed thereto, which set
forth the terms and conditions for a proposed settlement of this action and the Settling
Cases and for dismissal of the this action and the Settling Cases with prejudice upon the
terms and conditions set forth therein; and
WHEREAS, the Plaintiffs have moved for leave to file a Consolidated and Amended
Complaint, consolidating this action and the Settling Actions for purposes of settlement,
and the plaintiffs have lodged with the Court a Consolidated and Amended Complaint; and
WHEREAS, all defined terms contained herein shall have the same meanings as set forth
in the Agreement; and
WHEREAS, the Court having read and considered the Agreement, and
2
based upon the Agreement and all of the files, records, and proceedings herein, and it
appearing to the Court that upon preliminary examination the Agreement and settlement appears
fair, reasonable and adequate, and that a hearing should and will be held after notice to the
proposed Settlement Classes to confirm that the Agreement and settlement are fair, reasonable, and
adequate, and to determine whether a Final Order of Judgment and Dismissal should be
entered in this action based upon the Agreement;
IT IS HEREBY ORDERED THAT:
1. For purposes of settlement only, the Court has jurisdiction over the
subject matter of the Settling Actions and personal jurisdiction over the parties
and the members of the proposed Settlement Classes described below.
2. For purposes of settlement only, the Court allows the motion to consolidate this
action and the Settling Actions (hereinafter collectively referred to as the “Action”), and
accepts the Consolidated and Amended Complaint as filed. In the event that one or more of the
Settlement Classes as provided in the Agreement is not approved by the Court, such
Consolidated and Amended Complaint will be stricken and this order vacated automatically, as far
as they relate to any such disapproved Settlement Class, (i) concurrently with any order rejecting
approval of this Agreement or disapproving any such Settlement Class or, (ii) in the event that
the Court grants final approval of one or more Settlement Classes as provided in the Agreement but
such final approval order is subsequently reversed or modified on appeal, concurrently with any
order remanding the Action to this Court, in either
3
case without the need for any further order of this Court, and in either such instance any
Settlement Class that is not approved by the Court or for which certification is reversed or
modified on appeal will revert to its status immediately prior to the execution of the Agreement.
3. The Agreement and the settlement contained therein are preliminarily approved as fair,
reasonable, and adequate.
4. Pursuant to Rule 23(b)(3) of the West Virginia Rules of Civil Procedure, the Court
certifies the following Settlement Classes for purposes of settlement only:
(a) State Law Class: All residents of the several jurisdictions identified in the
chart attached hereto as Exhibit 1 who applied for and obtained a Refund Anticipation Loan (a
“RAL”) through any medium, by any name, advertised, marketed, offered or made by or through any
lender through any office operating under the trade name of “H&R Block” (including franchise or
sub-franchise offices of any Settling Defendant or Affiliate (as defined in the Agreement), as
defined herein, or any H&R Block offices such as in Sears stores) from January 1, 2000 through
December 23, 2005;
(b) West Virginia Class: All West Virginia residents who applied for and obtained a
RAL through any medium, by any name, advertised, marketed, offered or made by or through any
lender through any office operating under the trade name of “H&R Block” (including franchise or
sub-franchise offices of any HRB Defendant or Affiliate, as defined herein, or any H&R Block
offices such as in Sears
4
stores) from January 1, 1994 through December 23, 2005 who have not previously requested exclusion
from the Cummins class; provided, however, that persons who opted-out of the certified Cummins
litigation class and who obtained a RAL through any Settling Defendant or Affiliate in 2005, will
receive another opt-out opportunity for their 2005 RALs only.
(c) Becker Class: All Ohio residents who applied for and obtained a RAL through any
medium, by any name, advertised, marketed, offered or made by or through any lender through any
office operating under the trade name of “H&R Block” (including franchise or sub-franchise offices
of any Settling Defendant or Affiliate, as defined herein, or any H&R Block offices such as in
Sears stores) from January 1, 2000 through December 23, 2005.
(d) Mitchell/Green Class: All Maryland residents who applied for and obtained a RAL at
any H&R Block office in Maryland from January 1, 1992 through December 31, 1996 and did not
thereafter apply for and obtain a RAL subject to an arbitration provision, and all Alabama
residents who obtained a RAL from June 13, 1989 through December 31, 1996 through any “H&R Block”
office in Alabama for which the Settling Defendants herein received a license fee payment or
portion of the finance charge, and who did not previously request exclusion from their respective
class.
5. The Court makes the following appointments with respect to each Settlement Class, for
purposes of settlement only:
(a) State Law Class: Justin Sevey, Maryanne Hoekman and Renea
5
Griffith are appointed class representatives; and Daniel Hume, Esq., of Kirby Mclnerney &
Squire, LLP, Ronald L. Futterman, Esq., Michael I. Behn, Esq., and William W. Thomas, Esq., of
Futterman & Howard, Chtd, and Michael B. Hyman, Esq., William H. London, Esq., of Much Shelist
Freed Denenberg Ament & Rubenstein, P.C., and Scott S. Segal, Esq. of The Segal Law Firm are
appointed as class counsel to the State Law Class.
(b) West Virginia Class: Deadra Cummins, Ivan Bell and LaDonna Bell are appointed
class representative and Brian A. Glasser, Esq., H. F. Salsbery, Esq., John Barrett, Esq., and Eric
Snyder, Esq., of Bailey & Glasser, LLP are appointed class counsel to the West Virginia Class.
Brian Glasser is also appointed Coordinating Class Counsel.
(c) Becker Class: Lynn Becker is appointed class representative and John Roddy, Esq.,
Gary Klein, Esq., and Elizabeth Ryan, Esq., of Roddy Klein & Ryan, Ronald Frederick, Esq. of Ronald
Frederick & Associates, LLC, and Bruce L. Freeman, Esq. of Freeman & Chiartas are appointed class
counsel to the Becker Class.
(d) Mitchell/Green Class: Levon and Geral Mitchell and Joyce A. Green are appointed class
representatives and Steven A. Martino, Esq., Frederick T. Kuykendall III, Esq., and W. Lloyd
Copeland, Esq. of Taylor, Martino & Kuykendall, Steven E. Angstreich, Esq., Michael Coren, Esq.,
Carolyn C. Lindheim, Esq., of Levy, Angstreich, Finney, Baldante, Rubenstein and Coren, P.C.,
Charles J. Piven, Esq. of Law Offices of Charles A. Piven, P.A., and Marvin W. Masters of The
6
Masters Law Firm, L.C., are appointed class counsel to the Mitchell/Green class.
6. With respect to each of the respective Settlement Classes, this Court preliminarily finds
for settlement purposes only that: (a) the Settlement Class as defined above is so numerous that
joinder of all members is impracticable; (b) there are questions of law or fact common to the
Settlement Class; (c) the claims of the respective class representatives (the “Class
Representatives”), identified in paragraph 3, are typical of the claims of their respective class;
(d) the Class Representatives will fairly and adequately protect the interests of their respective
class; (e) the questions of law or fact common to the members of the Settlement Class predominate
over the questions affecting only individual members, and (e) certification of the Settlement Class
is superior to other available methods for the fair and efficient adjudication of the controversy.
In the event the Agreement terminates pursuant to its terms for any reason, the conditional
certification of the Settlement Classes pursuant to this Order shall be vacated automatically and
shall be null and void, and this action shall revert to its status immediately prior to the
execution of the Agreement.
7. The Court approves as to form the mail Notices attached hereto as Exhibit 2, and the
Summary Notice attached hereto as Exhibit 3. The mailing of the Notice and the publication of the
Summary Notice made as directed in this Order meet the requirements of Rule 23(c), and constitute
the best notice practicable under the circumstances and sufficient notice to all members of the
Settlement Classes, and the forms and methods of notice comply fully with all applicable law.
7
8. The Administrator shall, no later than March 15, 2006, cause to be mailed by first
class mail to the last known address of all Settlement Class Members, an appropriate Notice, along
with a claim form. Any mail returned with a forwarding address will be promptly re-mailed to such
address. The form of such Notices must be substantially in the form attached hereto as Exhibit 2,
as applicable. In addition, the Administrator shall, no later than March 15, 2006, cause a Summary
Notice be published twice in USA Today, two weeks apart. The form of such Summary Notice must be
substantially in the form attached hereto as Exhibit 3. The Administrator is directed to file with
the Court, and serve upon Coordinating Class Counsel and counsel for the Settling Defendants, prior
to the Final Hearing, a declaration of such mailings and publication.
9. The Settling Defendants shall pay the Notice Costs, as provided by the Agreement, Section
II, Paragraph 10, and Section X, Paragraphs 3 and 4.
10. The Court will order additional publication notice in Alabama and Maryland at the
expense of the Mitchell/Green Class. Counsel for the Mitchell/Green Class is instructed to
file with this Court a plan for additional publication notice in Alabama and Maryland within 30
days.
11. A hearing (the “Final Hearing”) shall be held on , at
a.m. to determine whether the proposed settlement of this Action is fair, reasonable, and adequate
and should be approved. The parties’ respective briefs and supporting papers in support of the
proposed settlement shall be filed on or before ___, 2006. The Final Hearing described in this
paragraph may be
8
postponed, adjourned, transferred or continued by order of the Court without further notice to the
Settlement Class. After the Final Hearing, the Court may enter a Final Order of Judgment and
Dismissal in accordance with the Agreement that will adjudicate the rights of all class members.
12. Any member of a Settlement Class who is not excluded from that Settlement Class and who
objects to the approval of the proposed settlement may appear at the Final Hearing in person or
through counsel to show cause why the proposed settlement should not be approved as fair,
reasonable, and adequate.
13. Objections to the proposed settlement shall be heard, and any papers or briefs submitted
in support of objections shall be considered by the Court only if, on or before May 1, 2006, said
objectors file with the Clerk of the Court, a statement of his/her objection, as well as the
specific reason(s), if any, for each objection, including any legal support the Settlement Class
Member wishes to bring to the Court’s attention and any evidence the Settlement Class Member wishes
to introduce in support of the objection. Objectors must serve copies thereof, together with proof
of service, on or before that date upon both Coordinating Counsel and counsel for the Settling
Defendants (by mail, hand or by facsimile transmission):
Coordinating Counsel:
Brian Glasser
Bailey & Glasser, LLP
227 Capitol Street
Charleston, West Virginia 25301
Fax: (304)342-1110
Brian Glasser
Bailey & Glasser, LLP
227 Capitol Street
Charleston, West Virginia 25301
Fax: (304)342-1110
Settling Defendants’ Counsel:
Matthew M. Neumeier
Jenner & Block LLP
Matthew M. Neumeier
Jenner & Block LLP
9
One IBM Plaza
‘Chicago, IL 60611-7603
Fax (312) 840-7749
‘Chicago, IL 60611-7603
Fax (312) 840-7749
Charles R. Bailey
Bailey & Wyant PLLC
P.O. Box 3710
Charleston, WV 25337
Fax (304) 343-3133
Bailey & Wyant PLLC
P.O. Box 3710
Charleston, WV 25337
Fax (304) 343-3133
The objections must state the name and number of this action. No Settlement Class member
shall be entitled to be heard and no objection shall be considered unless these requirements are
satisfied.
14. Any Settlement Class member who does not make his objection to the settlement in the
manner provided herein shall be deemed to have waived any such objection by appeal, collateral
attack, or otherwise.
15. Any member of a Settlement Class who desires to be excluded from that Settlement Class must
mail or otherwise deliver to the Administrator, as stated in the Notice and Summary Notice, an
appropriate written request for exclusion, including his or her name, address, telephone number and
Social Security number, that is personally signed by the Settlement Class Member, which request
must be postmarked no later than May 1, 2006 (the Opt-Out Date), and actually received by the
Administrator. No Settlement Class Member, or any person acting on behalf of or in concert or in
participation with that Settlement Class Member, may request exclusion of any other Settlement
Class Member from a Settlement Class. The original requests for exclusion shall be filed with the
Clerk of the Court by the
10
Administrator not later than 30 days after the Opt-Out Date. The filing shall redact the social
security number of the person requesting exclusion, except for the last three digits. Copies of
requests for exclusion will be provided by the Administrator to Class Counsel and counsel for the
Settling Defendants not later than five days after the Opt-Out Date. If this Agreement is approved,
any and all persons within a Settlement Class who have not submitted a timely, valid and proper
written request for exclusion from that Settlement Class will be bound by the releases and other
terms and conditions set forth therein and all proceedings, orders and judgments in the Action,
even if those persons have previously initiated or subsequently initiate individual litigation or
other proceedings against the Settling Defendants (or any of them) relating to the claims released
pursuant to or covered by the terms of the Agreement. The names and addresses of all excluded
individuals shall be attached as an exhibit to the Final Order of Judgment and Dismissal.
16. Any Settlement Class Member may enter an appearance in this action, at his or her own
expense, individually or through counsel of his or her own choice. All Settlement Class Members who
do not enter an appearance will be deemed to have been represented by Class Counsel.
17. All discovery and other pretrial proceedings in this action are stayed and suspended until
further order of this Court except such actions as may be necessary to implement the Agreement and
this Order.
18. In the event that one or more of the Settlement Classes as provided in the Agreement is not
approved by the Court, or for any reason the parties fail to
11
obtain a Final Order of Judgment and Dismissal for one or more of the Settlement Classes as
contemplated in the Agreement, or the Agreement is terminated pursuant to its terms, then the
Agreement and all orders entered in connection with any such disapproved Settlement Class hereafter
shall become null and void and of no further force and effect as far as they relate to any such
disapproved Settlement Class, and shall not be used or referred to for any purposes whatsoever. In
such event, the Agreement and all negotiations and proceedings as far as they relate to any such
disapproved Settlement Class shall be withdrawn without prejudice as to the rights of any and all
parties thereto, who shall be restored to their respective positions as of the date of the
execution of the Agreement.
19. In sum, the dates for performance are as follows:
| Class Notice Mailed by: | March 15, 2006 | |||||
| Publication Notice Complete on: | March 15, 2006 | |||||
| Claim Forms Postmarked by: | June 30, 2006 | |||||
| Requests for Exclusion Postmarked by: | May 1, 2006 | |||||
| Filing and Service of Objections by: | May 1, 2006 | |||||
| Final Approval Submissions: | ||||||
| Final Approval Hearing: | ||||||
DATED:
|
, 2005 | |||||||
| Hon. Louis Bloom |
12
1
Exhibit 1
Settling Jurisdictions
| 1. | Arkansas | ||
| 2. | Arizona | ||
| 3. | California | ||
| 4. | District of Columbia | ||
| 5. | Florida | ||
| 6. | Illinois | ||
| 7. | Indiana | ||
| 8. | Massachusetts | ||
| 9. | Maryland | ||
| 10. | Maine | ||
| 11. | Michigan | ||
| 12. | Minnesota | ||
| 13. | Missouri | ||
| 14. | Nebraska | ||
| 15. | New Hampshire | ||
| 16. | Nevada | ||
| 17. | Oregon | ||
| 18. | Pennsylvania | ||
| 19. | Tennessee | ||
| 20. | Utah | ||
| 21. | Virginia | ||
| 22. | Washington | ||
| 23. | Wisconsin. |
2
If You Got A Refund Anticipation Loan Through An H&R Block Office Between
January 1, 1994 and December 23, 2005. You Could Get A Payment From A
Class Action Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights
You Have And Requires That You Make A Choice About How to Proceed.
Important Dates
[ILLEGIBLE]
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
| 1. | Why Did I Get This Notice? | |
| 2. | What Is This Lawsuit About? | |
| 3. | Why Is This A Class Action? | |
| 4. | Why Is There A Settlement? | |
| 5. | How Do I Know If I Am Part Of The Settlement? | |
| 6. | What Does The Settlement Provide? | |
| 7. | How Much Will My Payments Be? | |
| 8. | How Can I Get A Payment? | |
| 9. | When Would I Get My Payment? | |
| 10. | Am I Giving Anything Up To Get A Payment Or Stay In The Class? | |
| 11. | Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)? | |
| 12. | What Do I Do If I Want To Exclude Myself? | |
| 13. | When And Where Will The Court Decide Whether To Approve The Settlement? | |
| 14. | Do I Have To Come To The Hearing? | |
| 15. | What If I Do Nothing? | |
| 16. | What If I Want To Object To The Settlement? | |
| 17. | What Is the Difference Between Excluding Myself And Objecting? | |
| 18. | Who Are The Lawyers For The Class? | |
| 19. | How Will Class Counsel’s Fees And Expenses Be Paid? | |
| 20. | Does The Class Representative Get Additional Compensation? | |
| 21. | What If The Court Does Not Approve The Settlement? | |
| 22. | Where Do I Get Additional Information? |
-1-
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office between
January 1, 1994 and December 23, 2005. You received this notice to inform you about
settlement of a class action lawsuit that may affect your rights. This notice provides
information about all of your options, so that you can evaluate those options before the
Court decides whether to approve the settlement. Those options include making a claim for
money from the settlement (see Questions 7-9), excluding yourself from the settlement
(Questions 11 & 12) or raising concerns about the fairness of the settlement (Question 16).
This package explains the lawsuit, the settlement, your legal rights, what benefits are
available, who is eligible for them, and how to get them. The Court in charge of the case is
the Circuit Court of Kanawha County, West Virginia (“the Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and various
related corporations. For simplicity, the H& R Block defendants are referred to throughout
the rest of this notice as simply “Block.” The cases were filed against Block in different
parts of the country at different times, but all essentially make the same claim — that
Block violated particular state laws in the way it made RALs available. The lawyers in these
cases have filed with the Court an Amended and Consolidated Class Action Complaint (called
the “Consolidated Action” from here on), which brings together all of the claims made in
these cases. One of the principal claims the Consolidated Action makes is that Block
violated the Credit Services Organization Acts of the affected jurisdictions, or violated
similar laws.
Block denies that it violated any laws, did anything wrong, or that anyone was harmed by its
conduct. Block nevertheless has agreed to settle the Consolidated Action solely to avoid the
burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a Settlement
of the claims in the Consolidated Action including claims that had been pending previously
in Ohio, Maryland, and Alabama. The Settlement, if approved, would resolve all litigation
involving RALs which Block sold in West Virginia between January 1, 1994 and December 23,
2005. Other cases are also being settled at the same time, in the same settlement agreement,
covering legal rights of individuals in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Deadra D. Cummins,
Ivan Bell and LaDonna Bell), sue on behalf of people who have similar claims. All these people are
a Class or Class Members. One court resolves the issues for all Class Members, except for those who
exclude themselves from the Class. Circuit Court Judge Louis Bloom is in charge of this class
action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representatives and the attorneys think the settlement is best
for all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a Cummins class member. That means that
you fit the description of the class which the Court certified for this settlement. The Court
decided that everyone who fits this description is a Class Member:
All West Virginia residents who applied for and obtained a RAL through any medium, by any name,
advertised, marketed, offered or made by or through any lender through any office operating under
the trade name of “H&R Block” (including franchise or sub-franchise offices of any Settling
Defendant or Affiliate, or any H&R Block offices such as in Sears stores) from January 1, 1994
through December 23, 2005, who did not previously request exclusion from the Cummins class, other
than those persons who previously requested exclusion from the Cummins class, subsequently obtained
a RAL through any Settling Defendant or Affiliate in 2005.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The Becker Class (Ohio residents) — January 1, 2000 to December 23, 2005;
b.)
The Mitchell/Green Class (residents of Maryland and Alabama)
— Maryland — January 1, 1992 to May
19, 2000, excluding those people who obtained RALs
after 1996 whose RAL application contains an arbitration clause; Alabama — June 13, 1989 through
December 31, 1996;
c.)
The State Law Class (residents of 22 states and the District
of Columbia) — January 1, 2000
through December 23, 2005: Arkansas, Arizona, California, District of Columbia, Florida, Illinois,
Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire,
Nevada, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington or Wisconsin.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a total
of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The total
Block will pay is called the “common fund.”
You are a member of the Cummins class. Cummins class members are entitled to $32.5 million of the
$62.5 million, before deductions for the pro rata portion of administration costs, attorney’s fees
and expenses relating to the Cummins Class, and service fees paid to the class representatives,
Deadra D. Cummins, Ivan Bell and LaDonna Bell. The State Law class will divide more than $22.5
million; the Becker class will divide more than $5.8 million; and the Mitchell/Green (Maryland and
Alabama) class will divide over $1.6 million; all before the same deductions are made for
administration costs, attorney’s fees and expenses, and service fees applicable to each class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that Cummins Class Members send in and how many RALs you had. If every class member submitted
a claim, your share of the common fund would be a minimum of $60.90 for each RAL you obtained
during the class period. However, only a percentage of class members will actually submit claim
forms. For example, if one of every two class members return claim forms, your share of the fund
would be $121.80 for each RAL you obtained ($60.90 times two). Please remember that this is only an
example; the amount you receive from the settlement could be greater or smaller. Your share will be
reduced by whatever percentage of the common fund is taken up with administration costs, attorney’s
fees, expenses, and service payments. It is unlikely that such costs will exceed 35%, but they
could be higher or lower. The maximum amount any class member can receive is $175 for each RAL
obtained during the class period.
8. How Can I Get A Payment?
To qualify for payment, you must send in a complete and valid claim form. A claim form is attached
to this Notice. You may also get a claim form from the Settlement Administrator’s website
[[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill out the form, include all the
information the form asks for, sign it, and mail it so that it is postmarked no later than June 30,
2006. You may also email the claim form to the Settlement Administrator at [claims@INSERTWEBADDRESS.com]. If you email the claim form, you must do so no later than midnight on June
30, 2006.
9. When Would I Get My Payment?
The Court will hold a hearing at time/date/month/2006 at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301, to decide whether to approve the settlement. If the
Court approves the settlement after that, there may be appeals. It’s always uncertain whether these
appeals can be resolved, and resolving them can take time, perhaps more than a year. The settlement
administrator will keep the settlement website at [www.INSERTWEBADDRESS.com] updated so that
everyone who is in the class may keep informed of the progress of the settlement. Please be
patient. Note: It is unlikely that you will receive your payment until six months or more after the
date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be considered a
member of the class, which means that you can’t sue, continue to sue, or be part of any other
lawsuit against Block about the legal issues in this case. Giving up your claims is called a
“release.” Unless you exclude yourself from the settlement, you will release your claims whether or
not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made in other
currently existing class actions that relate to the RAL or other products and services offered by
Block are not released. Claims under state law based solely on allegations that a tax preparer
failed (A) to properly prepare a tax return or (B) to maintain the confidentiality of taxpayer
information resulting in injury based on “stolen identity” or similar misuse of taxpayer
information or theft of a RAL check; and claims to enforce the terms and conditions of the
Settlement Agreement, are similarly not released.
Class members who do not exclude themselves, but do not make a claim for money from this settlement
may choose to arbitrate their individual claims
against Block for another year after the settlement is finalized. Although Class Counsel recommend
this settlement, they take no position on your likelihood of succeeding on an individual basis in
an arbitration case. You should obtain independent legal help if you need more information about
the economic value of the arbitration alternative to excluding yourself or making a claim for money
under the settlement.
The settlement requires Block to follow certain business practices with future RALs, and provides
Block with an incentive to register as a Credit Service Organization (“CSO”) in the jurisdictions
covered by the settlement. Block has two years to decide whether to register and come into
compliance with the various CSO statutes.
Important: If you decide to go back to Block to obtain a RAL during the two-year period Block has
to register as a CSO in the various jurisdictions, and Block does register and comply with your
jurisdiction’s CSO statute in that two-year period, then you will not be able to sue Block for any
new RAL violation that you claim happened during the two-year period. But, if Block does not
register as a CSO and comply with the CSO statute in your jurisdiction, you will be able to sue
based on any new RAL violation that you claimed happened during that period. In addition, any
deadline on when you can sue Block (called the “statute of limitations”) will be suspended for the
two-year period.
11. Can I Exclude Myself From The Settlement (Sometimes Called
“Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you will not
receive any payment from the common fund, you will not release any claims you may have against
Block, and you will not be bound by anything that happens in the Consolidated Action. If you opt
out, you will be free to pursue whatever legal rights you may have by pursuing your own lawsuit
against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins, v. H & R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The
Settlement?
The Court will hold a Fairness Hearing on time/date/ at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301. At this
hearing the Court will consider whether the settlement is fair, reasonable, and adequate. If there
are objections, the Court will consider them. The Court will listen to people who have asked to
speak at the hearing. The Court may also decide how much to pay to Class Counsel. After the
hearing, the Court will decide whether to approve the settlement. We do not know how long these
decisions will take. The hearing can be continued at any time by the Court without any further
notice to you.
14. Do I Have To Come To The Hearing?
No. You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1, 2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H&R Block, Inc., Civil Action No. 03-C-134). Your letter must be
received in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian A. Giasser, Esq.
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
227 Capitol Street
Charleston, WV 25301
(ii) Defendants’ Counsel:
| Matthew M. Neumeier | Charles R. Bailey | |||
| Jenner & Block LLP | Bailey & Wyant PLLC | |||
| One IBM Plaza | P.O. Box 3710 | |||
| Chicago, IL 60611 | Charleston, WV 25337-3710 |
(iii) The Court:
Clerk of Court
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you
exclude yourself, you have no basis to object because the case no longer affects you. Objecting is
telling the Court that you don’t like something about the settlement and you don’t want the Court
to approve it. You can object only if you stay in the Class.
18. Who Are The Lawyers For The Cummins Class?
The Court has appointed the following law firm to represent you and other Cummins Class Members.
These lawyers are called Class Counsel. If you want to be represented by your own lawyer, you may
hire one at your own expense.
Brian A. Glasser
H. F. Salsbery
John W. Barrett
Eric B. Snyder
Bailey & Glasser LLP
227 Capitol Street
Charleston,WV 25301
H. F. Salsbery
John W. Barrett
Eric B. Snyder
Bailey & Glasser LLP
227 Capitol Street
Charleston,WV 25301
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’ fees and
expenses in an amount not more than one-third of the portion of the common fund attributable to the
Cummins Class. The fees would pay Class Counsel for investigating the facts, litigating the case,
and negotiating
the settlement. The Court will determine the amount of any fees and expenses awarded to Class
Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. The Cummins class representatives will seek a service award in an amount to be
determined by the Court.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and reasonable,
the Settlement Agreement will be null and void, and all parties will be returned to their
respective pre-Settlement status in the various lawsuits that the proposed Settlement hopes to
resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about the
settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact Cummins Class Counsel.
Please Do Not Contact The Court Or Block For Information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Circuit Judge
Kanawha County, West Virginia
Dated:
, 2005
If You Got A Refund Anticipation Loan Through An H&R Block Office Between January 1, 2000 And
December 23, 2005, You Could Get A Payment From A
Class Action Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights You Have
And Requires That You Make A Choice About How to Proceed.
Important Dates
[ILLEGIBLE]
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
| 1. | Why Did I Get This Notice? | |
| 2. | What Is This Lawsuit About? | |
| 3. | Why Is This A Class Action? | |
| 4. | Why Is There A Settlement? | |
| 5. | How Do I Know If I Am Part Of The Settlement? | |
| 6. | What Does The Settlement Provide? | |
| 7. | How Much Will My Payments Be? | |
| 8. | How Can I Get A Payment? | |
| 9. | When Would I Get My Payment? | |
| 10. | Am I Giving Anything Up To Get A Payment Or Stay In The Class? | |
| 11. | Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)? | |
| 12. | What Do I Do If I Want To Exclude Myself? | |
| 13. | When And Where Will The Court Decide Whether To Approve The Settlement? | |
| 14. | Do I Have To Come To The Hearing? | |
| 15. | What If I Do Nothing? | |
| 16. | What If I Want To Object To The Settlement? | |
| 17. | What Is the Difference Between Excluding Myself And Objecting? | |
| 18. | Who Are The Lawyers For The Class? | |
| 19. | How Will Class Counsel’s Fees And Expenses Be Paid? | |
| 20. | Does The Class Representative Get Additional Compensation? | |
| 21. | What If The Court Does Not Approve The Settlement? | |
| 22. | Where Do I Get Additional Information? |
-1-
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office between
January 1, 2000 and December 23, 2005. You received this notice to inform you about
settlement of a class action lawsuit that may affect your rights. This notice provides
information about all of your options, so that you can evaluate those options before the
Court decides whether to approve the settlement. Those options include making a claim for
money from the settlement (see Questions 7-9), excluding yourself from the settlement
(Questions 11 & 12) or raising concerns about the fairness of the settlement (Question 16).
This package explains the lawsuit, the settlement, your legal rights, what benefits are
available, who is eligible for them, and how to get them. The Court in charge of the case is
the Circuit Court of Kanawha County, West Virginia (“the Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and various
related corporations. For simplicity, the H& R Block defendants are referred to throughout
the rest of this notice as simply “Block.” The cases were filed against Block in different
parts of the country at different times, but all essentially make the same claim — that
Block violated particular state laws in the way it made RALs available. The lawyers in these
cases have filed with the Court an Amended and Consolidated Class Action Complaint (called
the “Consolidated Action” from here on), which brings together all of the claims made in
these cases. One of the principal claims the Consolidated Action makes is that Block
violated the Credit Services Organization Acts of the affected jurisdictions, or violated
similar laws.
Block denies that it violated any laws, did anything wrong, or that anyone was harmed by its
conduct. Block nevertheless has agreed to settle the Consolidated Action solely to avoid the
burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a Settlement
of the claims in the Consolidated Action including claims that had been pending previously
in Ohio, Maryland, and Alabama. The Settlement, if approved, would resolve all litigation
involving RALs which Block sold in Ohio between January 1, 2000 and December 23, 2005. Other
cases are also being settled at the same time, in the same settlement agreement, covering
legal rights of individuals in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Lynn Becker), sue
on behalf of people who have similar claims. All these people are a Class or Class Members. One
court resolves the issues for all Class Members, except for those who exclude themselves from the
Class. Circuit Court Judge Louis Bloom is in charge of this class action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representative and the attorneys think the settlement is best for
all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a Becker class member. That means that
you fit the description of the class which the Court certified for this settlement. The Court
decided that everyone who fits this description is a Class Member:
All Ohio residents who applied for and obtained a RAL through any medium, by any name, advertised,
marketed, offered or made by or through any lender through any office operating under the trade
name of “H&R Block” (including franchise or sub-franchise offices of any Settling Defendant or
Affiliate, as defined herein, or any H&R Block offices such as in Sears stores) from January 1,
2000 through December 23, 2005.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The Cummins Class (West Virginia residents) — January 1, 1994 to December 23, 2005;
b.)
The Mitchell/Green Class (residents of Maryland and Alabama)
— Maryland — January 1, 1992 to May
19, 2000, excluding those people who obtained RALs after 1996 whose RAL application contains an
arbitration clause; Alabama — June 13, 1989 through December 31, 1996;
c.)
The State Law Class (residents of 22 states and the District
of Columbia) — January 1, 2000
through December 23, 2005: Arkansas, Arizona, California, District of Columbia, Florida, Illinois,
Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire,
Nevada, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington or Wisconsin.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a total
of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The total
Block will pay is called the “common fund.”
You are a member of the Becker class. Becker class members are entitled to more than $5.8 million
of the $62.5 million, before deductions for the pro rata portion of administration costs,
attorney’s fees and expenses relating to the Becker Class, and service fees paid to the class
representative, Lynn Becker. The Cummins class members will divide $32.5 million; the State Law
class will divide more than $22.5 million; and the Mitchell/Green (Maryland and Alabama) class will
divide more than $1.6 million; all before the same deductions are made for administration costs,
attorney’s fees and expenses, and service fees applicable to each class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that Becker Class Members send in and how many RALs you had. If every class member submitted
a claim, your share of the common fund would be a minimum of $3.66 for each RAL you obtained during
the class period. However, only a percentage of class members will actually submit claim forms. For
example, if only one of every four class members return claim forms, your share of the fund would
be $14.64 for each RAL you obtained ($3.66 times four). Your share will be reduced by whatever
percentage of the common fund is taken up with administration costs, attorney’s fees, expenses, and
service payments. It is unlikely that such costs will exceed 30%, but they could be higher or
lower. Please remember that this is only an example; the amount you receive from the settlement
could be greater or smaller.
8. How Can I Get A Payment?
To
qualify for payment, you must send in a complete and valid claim
form. A claim form is attached
to this Notice. You may also get a claim form from the Settlement Administrator’s website
[[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill out the form, include all the
information the form asks for, sign it, and mail it so that it is postmarked no later than June 30,
2006. You may also email the claim form to the Settlement Administrator at [claims@
INSERTWEBADDRESS.com]. If you email the claim form, you must do so no later than midnight on June
30, 2006.
9. When Would I Get My Payment?
The Court will hold a hearing at time/date/month/2006 at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301, to decide whether to approve the settlement. If the
Court approves the settlement after that, there may be appeals. It’s always uncertain whether these
appeals can be resolved, and resolving them can take time, perhaps more than a year. The settlement
administrator will keep the settlement website at [www.INSERTWEBADDRESS.com] updated so that
everyone who is in the class may keep informed of the progress of the settlement. Please be
patient. Note: It is unlikely that you will receive your payment until six months or more after the
date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be considered a
member of the class, which means that you can’t sue, continue to sue, or be part of any other
lawsuit against Block about the legal issues in this case. Giving up your claims is called a
“release.” Unless you exclude yourself from the settlement, you will release your claims whether or
not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made in other
currently existing class actions that relate to the RAL or other products and services offered by
Block are not released. Claims under state law based solely on allegations that a tax preparer
failed (A) to properly prepare a tax return or (B) to maintain the confidentiality of taxpayer
information resulting in injury based on “stolen identity” or similar misuse of taxpayer
information or theft of a RAL check; and claims to enforce the terms and conditions of the
Settlement Agreement, are similarly not released.
Class members who do not exclude themselves, but do not make a claim for money from this settlement
may choose to arbitrate their individual claims against Block for another year after the settlement
is finalized. Although Class Counsel recommend this settlement, they take no position on your
likelihood of succeeding on an individual basis in an arbitration case. You should obtain
independent legal help if you need more information about the economic value of the arbitration
alternative to excluding yourself or making a claim for money under the settlement.
The settlement requires Block to follow certain business practices with future RALs, and provides
Block with an incentive to register as a Credit Service Organization (“CSO”) in the jurisdictions
covered by the settlement. Block has two years to decide whether to register and come into
compliance with the various CSO statutes.
Important: If you decide to go back to Block to obtain a RAL during the two-year period Block has
to register as a CSO in the various jurisdictions, and Block does register and comply with your
jurisdiction’s CSO statute in that two-year period, then you will not be able to sue Block for any
new RAL violation that you claim happened during the two-year period. But, if Block does not
register as a CSO and comply with the CSO statute in your jurisdiction, you will be able to sue
based on any new RAL violation that you claimed happened during that period. In addition, any
deadline on when you can sue Block (called the “statute of limitations”) will be suspended for the
two-year period.
11. Can I Exclude Myself From The Settlement (Sometimes Called
“Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you will not
receive any payment from the common fund, you will not release any claims you may have against
Block, and you will not be bound by anything that happens in the Consolidated Action. If you opt
out, you will be free to pursue whatever legal rights you may have by pursuing your own lawsuit
against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins. v. H & R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The
Settlement?
The
Court will hold a Fairness Hearing on time/date/ at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301. At this hearing the Court will consider whether the
settlement is fair, reasonable, and adequate. If there are objections, the Court will consider
them. The Court will listen to people who have asked to speak at the hearing. The Court may also
decide how much to pay to Class Counsel. After the hearing, the Court will decide whether to
approve the settlement. We do not know how long these decisions will take. The hearing can be
continued at any time by the Court without any further notice to you.
14. Do I Have To Come To The Hearing?
No. You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1,
2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H & R Block, Inc., Civil Action No. 03-C-134). Your letter must be
received in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian
A. Glasser, Esq.
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
227 Capitol Street
Charleston, WV 25301
(ii) Defendants’ Counsel:
| Matthew M. Neumeier | Charles R. Bailey | |||
| Jenner & Block LLP | Bailey & Wyant PLLC | |||
| One IBM Plaza | P.O. Box 3710 | |||
| Chicago, IL 60611 | Charleston, WV 25337-3710 |
(iii) The Court:
Clerk of Court
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you
exclude yourself, you have no basis to object because the case no longer affects you. Objecting
is telling the Court that you don’t like something about the settlement and you don’t want the
Court to approve it. You can object only if you stay in the Class.
18. Who Are The Lawyers For The Becker Class?
The Court has appointed the following law firms to represent you and other Becker Class
Members. These lawyers are called Class Counsel. If you want to be represented by your own
lawyer, you may hire one at your own expense.
| Ronald Frederick | John Roddy | |||
| Ronald Frederick & Assoc., LLC | Gary Klein | |||
| 55 Public Square, Suite 1300 | Elizabeth Ryan | |||
| Cleveland, Ohio 44113 | Roddy, Klein & Ryan | |||
| 727 Atlantic Avenue | ||||
| Boston, MA 02111 |
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’ fees
and expenses in an amount not more than 25% of the portion of the common fund attributable to
the Becker Class. The fees would pay Class Counsel for investigating the facts, litigating the
case, and negotiating the
settlement. The Court will determine the amount of any fees and expenses awarded to Class
Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. Lynn Becker will seek a “service award” of $5,000. The Court will determine
whether Ms. Becker receives a “service award” and the amount of that award.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and reasonable,
the Settlement Agreement will be null and void, and all parties will be returned to their
respective pre-Settlement status in the various lawsuits that the proposed Settlement hopes to
resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about the
settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact Becker Class Counsel.
Please Do Not Contact The Court Or Block For Information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Circuit Judge
Kanawha County, West Virginia
Dated:
, 2005
If You Got A Refund Anticipation Loan Through An H&R Block Office In
Maryland Between January 1, 1992 And December 31, 1996, Or In Alabama
from June 13, 1989 through December 31, 1996. You Could Get A Payment
From A Class Action Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights You Have
And Requires That You Make A Choice About How to Proceed.
Important Dates
[ILLEGIBLE]
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
| 1. | Why Did I Get This Notice? | |
| 2. | What Is This Lawsuit About? | |
| 3. | Why Is This A Class Action? | |
| 4. | Why Is There A Settlement? | |
| 5. | How Do I Know If I Am Part Of The Settlement? | |
| 6. | What Does The Settlement Provide? | |
| 7. | How Much Will My Payments Be? | |
| 8. | How Can I Get A Payment? | |
| 9. | When Would I Get My Payment? | |
| 10. | Am I Giving Anything Up To Get A Payment Or Stay In The Class? | |
| 11. | Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)? | |
| 12. | What Do I Do If I Want To Exclude Myself? | |
| 13. | When And Where Will The Court Decide Whether To Approve The Settlement? | |
| 14. | Do I Have To Come To The Hearing? | |
| 15. | What If I Do Nothing? | |
| 16. | What If I Want To Object To The Settlement? | |
| 17. | What Is the Difference Between Excluding Myself And Objecting? | |
| 18. | Who Are The Lawyers For The Class? | |
| 19. | How Will Class Counsel’s Fees And Expenses Be Paid? | |
| 20. | Does The Class Representative Get Additional Compensation? | |
| 21. | What If The Court Does Not Approve The Settlement? | |
| 22. | Where Do I Get Additional Information? |
-1-
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office in
Maryland between January 1, 1992 and December 31,1996, or through an H&R Block office in
Alabama between June 13, 1989 and December 31, 1996. You received this notice to inform
you about settlement of a class action lawsuit that may affect your rights. This notice
provides information about all of your options, so that you can evaluate those options
before the Court decides whether to approve the settlement. Those options include making
a claim for money from the settlement (see Questions 7-9), excluding yourself from the
settlement (Questions 11 & 12) or raising concerns about the fairness of the settlement
(Question 16). This package explains the lawsuit, the settlement, your legal rights, what
benefits are available, who is eligible for them, and how to get them. The Court in
charge of the case is the Circuit Court of Kanawha County, West Virginia (“the
Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and
various related corporations. For simplicity, the H&R Block defendants are referred to
throughout the rest of this notice as simply “Block.” The cases were filed against Block
in different parts of the country at different times, but all essentially make the same
claim — that Block violated particular state laws in the way it made RALs available. The
lawyers in these cases have filed with the Court an Amended and Consolidated Class Action
Complaint (called the “Consolidated Action” from here on), which brings together all of
the claims made in these cases. One of the principal claims the Consolidated Action makes
is that Block violated the Credit Services Organization Acts of the affected
jurisdictions, or violated similar laws.
Block
denies that it violated any laws, did anything wrong, or that anyone was harmed by
its conduct. Block nevertheless has agreed to settle the Consolidated Action solely to
avoid the burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a
Settlement of the claims in the Consolidated Action including claims that had been
pending previously in Ohio, Maryland, and Alabama. The Settlement, if approved, would
resolve all litigation involving RALs which Block sold in Alabama between June 13, 1989
and December 31, 1996, and in Maryland between January 1, 1992 and December 31, 1996. Other cases are also being settled at
the same time, in the same settlement agreement, covering legal rights of
individuals in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Levon Mitchell
and Geral Mitchell of Alabama, and Joyce A. Green of Maryland) sue on behalf of people who have
similar claims. All these people are a Class or Class Members. One court resolves the issues for
all Class Members, except for those who exclude themselves from the Class. Circuit Court Judge
Louis Bloom is in charge of this class action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representatives and the attorneys think the settlement is best
for all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a Mitchell/Green class member. That
means that you fit the description of the class which the Court certified for this settlement. The
Court decided that everyone who fits this description is a Class Member:
All Maryland residents who applied for and obtained a RAL at any H&R Block office in Maryland from
January 1, 1992 through December 31, 1996 and did not thereafter apply for and obtain a RAL
subject to an arbitration provision, and all individuals who obtained a RAL from June 13, 1989
through December 31, 1996 through any “H&R Block” office in Alabama for which the Settling
Defendants herein received a license fee payment or portion of the finance charge, and who did not
previously request exclusion from their respective classes that were previously certified or timely
request exclusion from this class.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The Cummins Class (West Virginia residents) — January 1, 1994 to December 23, 2005;
b.) The Becker Class (residents of Ohio) — January 1, 2000 to December 23, 2005
c.) The State Law Class (residents of 22 states and the District of Columbia) — January 1, 2000
through December 23, 2005: Arkansas, Arizona, California, District of Columbia, Florida, Illinois,
Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire,
Nevada, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington or Wisconsin.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a total
of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The total
Block will pay is called the “common fund.”
You are a member of the Mitchell/Green class. Mitchell/Green class members are entitled to over
$1.6 million of the $62.5 million, before deductions for the pro rata portion of administration
costs, attorney’s fees and expenses relating to the Mitchell/Green class, and service fees paid to
the class representatives, Joyce A. Green, Levon Mitchell and Geral Mitchell. The Cummins class
members will divide $32.5 million; the State Law class will divide more than $22.5 million; and the
Becker class will divide more than $5.8 million; all before the same deductions are made for
administration costs, attorney’s fees and expenses, and service fees applicable to each class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that Mitchell/Green Class Members send in and how many RALs you had. If every class member
submitted a claim, your share of the common fund would be a minimum of $3.66 for each RAL you
obtained during the class period. However, only a percentage of class members will actually
submit claim forms. For example, if only one of every four class members return claim forms, your
share of the fund would be $14.64 for each RAL you obtained ($3.66 times four). Your share will be
reduced by whatever percentage of the common fund is taken up with administration costs, attorney’s
fees, expenses, and service payments. It is unlikely that such costs will exceed 30%, but they
could be higher or lower. Please remember that
this is only an example; the amount you receive from the settlement could be greater or smaller.
8. How Can I Get A Payment?
To qualify
for payment, you must send in a complete and valid claim form. A claim form is attached
to this Notice. You may also get a claim form from the Settlement Administrator’s website
[[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill out the form, include all the
information the form asks for, sign it, and mail it so that it
is postmarked no later than June 30,
2006. You may also email the claim form to the Settlement
Administrator at [claims@INSERTWEBADDRESS.com]. If you email the claim form, you must do so no later than midnight on June
30, 2006.
9. When Would I Get My Payment?
The Court
will hold a hearing at time/date/month/2006 at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301, to decide whether to approve the settlement. If the
Court approves the settlement after that, there may be appeals. It’s always uncertain whether these
appeals can be resolved, and resolving them can take time, perhaps more than a year. The settlement
administrator will keep the settlement website at [www.INSERTWEBADDRESS.com] updated so that
everyone who is in the class may keep informed of the progress of the settlement. Please be
patient. Note: It is unlikely that you will receive your payment until six months or more after the
date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be
considered a member of the class, which means that you can’t sue, continue to sue, or be
part of any other lawsuit against Block about the legal issues in this case. Giving up
your claims is called a “release.” Unless you exclude yourself from the settlement, you
will release your claims whether or not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made
in other currently existing class actions that relate to the RAL or other products and
services offered by Block are not released. Claims under state law based solely on
allegations that a tax preparer failed (A) to properly prepare a tax return or (B) to
maintain the confidentiality of taxpayer information resulting in injury based on
“stolen identity” or similar misuse of taxpayer information or theft of a RAL check; and
claims to enforce the terms and conditions of the Settlement Agreement, are similarly
not released.
Class members who do not exclude themselves, but do not make a claim for money from this settlement may choose to arbitrate their individual claims
against Block for another year after the settlement is finalized. Although Class Counsel recommend
this settlement, they take no position on your likelihood of succeeding’on an individual basis in
an arbitration case. You should obtain independent legal help if you need more information about
the economic value of the arbitration alternative to excluding yourself or making a claim for money
under the settlement.
The settlement requires Block to follow certain business practices with future RALs.
11. Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you
will not receive any payment from the common fund, you will not release any claims you may have
against Block, and you will not be bound by anything that happens in the Consolidated Action. If
you opt out, you will be free to pursue whatever legal rights you may have by pursuing your own
lawsuit against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins. v. H &R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The Settlement?
The Court
will hold a Fairness Hearing on time/date/ at the Kanawha County Judicial Annex,
111 Court Street, Charleston, West Virginia 25301. At this hearing the Court will consider whether
the settlement is fair, reasonable, and adequate. If there are objections, the Court will consider
them. The Court will listen to people who have asked to speak at the hearing. The Court may also
decide how much to pay to Class Counsel. After the hearing, the Court will decide whether to
approve the settlement. We do not know how long these decisions will take. The hearing can be
continued at any time by the Court without any further notice to you.
14. Do I Have To Come To The Hearing?
No, You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1,
2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H&R Block, Inc., Civil Action No. 03-C-134). Your letter must be received
in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian A. Glasser, Esq.
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
(ii) Defendants’ Counsel: |
||
Matthew M. Neumeier
|
Charles R. Bailey | |
Jenner & Block LLP
|
Bailey & Wyant PLLC | |
One IBM Plaza
|
P.O. Box 3710 | |
Chicago, IL 60611
|
Charleston, WV 25337-3710 |
(iii) The Court:
Clerk of Court
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you exclude
yourself, you have no basis to object because the case no longer affects you. Objecting is telling
the Court that you don’t like something about the settlement and you don’t want the Court to
approve it. You can object only if you stay in the Class.
18. Who Are The Lawyers For The Mitchell/Green Class?
The Court has appointed the following law firms to represent you and other Mitchell/Green Class
Members. These lawyers are called Class Counsel. If you want to be represented by your own lawyer,
you may hire one at your own expense.
Steven E. Angstreich, Esq.
|
Steven A. Martino, Esq. | |
Michael Coren, Esq.
|
Frederick T. Kuykendall, III, Esq. | |
Carolyn C. Lindheim, Esq.
|
W. Lloyd Copeland, Esq. | |
Levy Angstreich Finney Baldante
|
Taylor, Martino & Kuykendall | |
Rubenstein & Coren, P.C.
|
51 St. Joseph Street | |
1616 Walnut Street, 5th Floor
|
Mobile, AL 36602 | |
Philadelphia, PA 19103 |
||
Charles J. Piven, Esq. |
||
Law Offices of Charles J. Piven, P.A. |
||
The World Trade Center — Baltimore |
||
401 East Pratt Street, Suite 2525 |
||
Baltimore, Maryland 21202 |
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’ fees and
expenses in an amount not more than 25% of the portion of the common fund attributable to the
Mitchell/Green Class. The fees would pay Class Counsel for investigating the facts, litigating the
case, and negotiating the settlement. The Court will determine the amount of any fees and expenses
awarded to Class Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. Joyce A. Green, Levon Mitchell and Geral Mitchell will seek a “service award”
of $5,000. The Court will determine whether they receive a “service award” and the amount of that
award.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and reasonable,
the Settlement Agreement will be null and void, and all parties will be returned to their
respective pre-Settlement status in the various lawsuits that the proposed Settlement hopes to
resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about the
settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact Mitchell/Green Class
Counsel.
Please Do Not Contact The Court Or Block For Information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Dated:
, 2005
If You Got A Refund Anticipation Loan Through An H&R Block Office Between January 1, 2000 and December 23, 2005. You Could Get A Payment From A Class Action
Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights You Have And Requires That You Make A Choice About How to Proceed.
Important Dates
[ILLEGIBLE]
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
1. Why Did I Get This Notice?
2. What Is This Lawsuit About?
3. Why Is This A Class Action?
4. Why Is There A Settlement?
5. How Do I Know If I Am Part Of The Settlement?
6. What Does The Settlement Provide?
7. How Much Will My Payments Be?
8. How Can I Get A Payment?
9. When Would I Get My Payment?
10. Am I Giving Anything Up To Get A Payment Or Stay In The Class?
11. Can I
Exclude Myself From The Settlement (Sometimes Called “Opting Out”)?
12. What Do I Do If I Want To Exclude Myself?
13. When And Where Will The Court Decide Whether To Approve The Settlement?
14. Do I Have To Come To The Hearing?
15. What If I Do Nothing?
16. What If I Want To Object To The Settlement?
17. What Is the Difference Between Excluding Myself And Objecting?
18. Who Are The Lawyers For The Class?
19. How Will Class Counsel’s Fees And Expenses Be Paid?
20. Does The Class Representative Get Additional Compensation?
21. What If The Court Does Not Approve The Settlement?
22. Where Do I Get Additional Information?
-1-
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office between January
1, 2000 and December 23, 2005. You received this notice to inform you about settlement of a class
action lawsuit that may affect your rights. This notice provides information about all of your
options, so that you can evaluate those options before the Court decides whether to approve the
settlement. Those options include making a claim for money from the settlement (see Questions 7-9),
excluding yourself from the settlement (Questions 11 & 12) or raising concerns about the fairness
of the settlement (Question 16). This package explains the lawsuit, the settlement, your legal
rights, what benefits are available, who is eligible for them, and how to get them. The Court in
charge of the case is the Circuit Court of Kanawha County, West Virginia (“the Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and various
related corporations. For simplicity, the H& R Block defendants are referred to
throughout the rest of this notice as simply “Block.” The cases were filed against Block
in different parts of the country at different times, but all essentially make the same
claim — that Block violated particular state laws in the way it made RALs available. The
lawyers in these cases have filed with the Court an Amended and Consolidated Class Action
Complaint (called the “Consolidated Action” from here on), which brings together all of
the claims made in these cases. One of the principal claims the Consolidated Action makes
is that Block violated the Credit Services Organization Acts of the affected
jurisdictions, or violated similar laws.
Block denies that it violated any laws, did anything wrong, or that anyone was harmed by
its conduct. Block nevertheless has agreed to settle the Consolidated Action solely to
avoid the burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a
Settlement of the claims in the Consolidated Action including claims that had been
pending previously in Ohio, Maryland, and Alabama. The Settlement, if approved, would
resolve all litigation involving RALs which Block sold in Arkansas, Arizona, California,
District of Columbia, Florida, Illinois, Indiana, Massachusetts, Maryland, Maine,
Michigan, Minnesota, Missouri, Nebraska, New Hampshire, Nevada, Oregon, Pennsylvania,
Tennessee, Utah, Virginia, Washington and Wisconsin between January 1, 2000 and December
23, 2005.
Other cases are also being settled at the same time, in the same settlement agreement,
covering legal rights of individuals in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Renea Griffith,
Maryanne Hoekman and Justin Sevey), sue on behalf of people who have similar claims. All these
people are a Class or Class Members. One court resolves the issues for all Class Members, except
for those who exclude themselves from the Class. Circuit Court Judge Louis Bloom is in charge of
this class action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representatives and the attorneys think the settlement is best
for all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a State Law class member. That means
that you fit the description of the class which the Court certified for this settlement. The Court
decided that everyone who fits this description is a Class Member:
All residents of Arkansas, Arizona, California, District of Columbia, Florida, Illinois, Indiana,
Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, Nevada,
Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington and Wisconsin who applied for and
obtained a RAL through any medium, by any name, advertised, marketed, offered or made by or through
any lender through any office operating under the trade name of “H&R Block” (including franchise or
sub-franchise offices of any Settling Defendant or Affiliate, or any H&R Block offices such as in
Sears stores) from January 1, 2000 through December 23, 2005.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The Cummins Class (West Virginia residents) — January 1, 1994 to December 23, 2005;
b.) The Mitchell/Green Class (residents of Maryland and Alabama) — Maryland — January 1,1992 to May
19, 2000, excluding those people who obtained RALs after 1996 whose RAL application contains an
arbitration clause; Alabama — June 13, 1989 through December 31, 1996;
c.) The Becker Class (residents of Ohio) — January 1, 2000 through December 23, 2005.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a total
of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The total
Block will pay is called the “common fund.”
You are a member of the State Law Class. State Law class members are entitled to over $22.5 million
of the $62.5 million, before deductions for the pro rata portion of administration costs,
attorney’s fees and expenses relating to the State Law class, and service fees paid to the class
representatives, Renea Griffith, Maryanne Hoekman and Justin Sevey. The Cummins class members will
divide $32.5 million; the Becker class will divide over $5.8 million; and the Mitchell/Green
(Maryland and Alabama) class will divide more than $1.6 million; all before the same deductions are
made for administration costs, attorney’s fees and expenses, and service fees applicable to each
class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that State Law Class Members send in and how many RALs you had. If every class member
submitted a claim, your share of the common fund would be a minimum of $1.67 for each RAL you
obtained during the class period. However, only a percentage of class members will actually
submit claim forms. For example, if only one of every four class members return claim forms, your
share of the fund would be $6.68 for each RAL you obtained ($1.67 times four). Your share will be
reduced by whatever percentage of the common fund is taken up with administration costs, attorney’s
fees, expenses, and service payments. It is unlikely that such costs will exceed 30%, but they
could be higher or lower. Please remember that this is only an example; the amount you receive from
the settlement could be greater or smaller.
8. How Can I Get A Payment?
To qualify for payment, you must send in a complete and valid claim form. A claim form is
attached to this Notice. You may also get a claim form from the Settlement
Administrator’s website [[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill
out the form, include all the information the form asks for, sign it, and mail it so that
it is postmarked no later than June 30, 2006. You may also email the claim form to the
Settlement Administrator at [claims@INSERTWEBADDRESS.com]. If you email the claim form,
you must do so no later than midnight on June 30, 2006.
9. When Would I Get My Payment?
The Court will hold a hearing at time/date/month/2006 at the Kanawha County Judicial
Annex, 111 Court Street, Charleston, West Virginia 25301, to decide whether to approve
the settlement. If the Court approves the settlement after that, there may be appeals.
It’s always uncertain whether these appeals can be resolved, and resolving them can take
time, perhaps more than a year. The settlement administrator will keep the settlement
website at [www.INSERTWEBADDRESS.com] updated so that everyone who is in the class may
keep informed of the progress of the settlement. Please be patient.
Note: It is unlikely that you will receive your payment until six months or more after
the date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be
considered a member of the class, which means that you can’t sue, continue to sue, or be
part of any other lawsuit against Block about the legal issues in this case. Giving up
your claims is called a “release.” Unless you exclude yourself from the settlement, you
will release your claims whether or not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made
in other currently existing class actions that relate to the RAL or other products and
services offered by Block are not released. Claims under state law based solely on
allegations that a tax preparer failed (A) to properly prepare a tax return or (B) to
maintain the confidentiality of taxpayer information resulting in injury based on “stolen
identity” or similar misuse of taxpayer information or theft of a RAL check; and claims
to enforce the terms and conditions of the Settlement Agreement, are similarly not
released.
Class members who do not exclude themselves, but do not make a claim for money from this
settlement may choose to arbitrate their individual claims against Block for another year
after the settlement is finalized. Although Class Counsel recommend this settlement, they
take no position on your likelihood of succeeding on an individual basis in an arbitration case. You should obtain
independent legal help if you need more information about the economic value of the arbitration
alternative to excluding yourself or making a claim for money under the settlement.
The settlement requires Block to follow certain business practices with future RALs, and provides
Block with an incentive to register as a Credit Service Organization (“CSO”) in the jurisdictions
covered by the settlement. Block has two years to decide whether to register and come into
compliance with the various CSO statutes.
Important: If you decide to go back to Block to obtain a RAL during the two-year period Block has
to register as a CSO in the various jurisdictions, and Block does register and comply with your
jurisdiction’s CSO statute in that two-year period, then you will not be able to sue Block for any
new RAL violation that you claim happened during the two-year period. But, if Block does not
register as a CSO and comply with the CSO statute in your jurisdiction, you will be able to sue
based on any new RAL violation that you claimed happened during that period. In addition, any
deadline on when you can sue Block (called the “statute of limitations”) will be suspended for the
two-year period.
11. Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you will not
receive any payment from the common fund, you will not release any claims you may have against
Block, and you will not be bound by anything that happens in the Consolidated Action. If you opt
out, you will be free to pursue whatever legal rights you may have by pursuing your own lawsuit
against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins. v. H &
R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The Settlement?
The Court will hold a Fairness Hearing on time/date/ at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301. At this hearing the Court will consider whether the
settlement is fair, reasonable, and adequate. If there are objections, the Court will consider
them. The Court will listen to people who have asked to speak at the hearing. The Court may also
decide how much to pay to Class Counsel. After the hearing, the Court will decide whether to
approve the settlement. We do not know how long these decisions will take. The hearing can be
continued at any time by the Court without any further notice to you.
14. Do I Have To Come To The Hearing?
No. You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1, 2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H & R Block, Inc., Civil Action No. 03-C-134). Your letter must be
received in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian A.Glasser, Esq.
Bailey & Glasser, LLP |
||
227 Capitol Street |
||
Charleston, WV 25301 |
||
(ii) Defendants’ Counsel: |
||
Matthew M. Neumeier
|
Charles R. Bailey | |
Jenner & Block LLP
|
Bailey & Wyant PLLC | |
One IBM Plaza
|
P.O. Box 3710 | |
Chicago, IL 60611
|
Charleston, WV 25337-3710 | |
(iii) The Court: |
||
Clerk of Court |
||
Kanawha County Circuit Court |
||
111 Court Street |
||
Charleston, WV 25301 |
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you
exclude yourself, you have no basis to object because the case no longer affects you. Objecting is
telling the Court that you don’t like something about the settlement and you don’t want the Court
to approve it. You can object only if you stay in the Class.
18. Who Are The Lawyers For The State Law Class?
The Court has appointed the following law firms to represent you and other State Law Class Members.
These lawyers are called Class Counsel. If you want to be represented by your own lawyer, you may
hire one at your own expense.
Daniel Hume, Esq.
|
Ronald L. Futterman, Esq. | |
Kirby Mclnerney & Squire. LLP
|
Michael l. Behn, Esq. | |
830 Third Avenue, 10th Floor
|
William W. Thomas, Esq. | |
New York, NY 10022
|
Futterman & Howard, Chtd. | |
| 122 S. Michigan Ave. Suite 1850 | ||
Michael B. Hyman, Esq.
|
Chicago, IL 60603 | |
William H. London, Esq. |
||
Much Shelist Freed Denenberg |
||
Ament & Rubenstein, P.C. |
||
191 North Wacker, Suite 1800 |
||
Chicago, IL 60606 |
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’ fees and
expenses in an amount not more than 25% of the portion of the common fund attributable to the State
Law Class. The fees would pay Class Counsel for investigating the facts, litigating the case, and
negotiating the settlement. The Court will determine the amount of any fees and expenses awarded to
Class Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. Renea Griffith, Maryanne Hoekman and Justin Sevey will seek a “service award”
of $5,000. The Court will determine whether they receive “service awards” and the amount of their
award.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and reasonable,
the Settlement Agreement will be null and void, and all parties will be returned to their
respective pre-Settlement status in the various lawsuits that the proposed Settlement hopes to
resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about the
settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact State Law Class Counsel.
Please Do Not Contact The Court Or Block For Information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Circuit Judge
Kanawha County, West Virginia
Dated:
, 2005
3
SUMMARY NOTICE OF PENDENCY AND PROPOSED
SETTLEMENT OF CLASS ACTION AND HEARING
SETTLEMENT OF CLASS ACTION AND HEARING
If You Got A Refund Anticipation Loan From H&R Block
This Notice Concerns Settlement Of A Lawsuit Which May Affect You
This Notice Concerns Settlement Of A Lawsuit Which May Affect You
This
Notice is given pursuant to Rule 23 of the West Virginia Rules of Civil
Procedure and the December___, 2005 Order of the Circuit Court of Kanawha County, West Virginia
(“Court”) in a case called Cummins v. H&R Block, Inc., Civil Action No. 03-C-134. A settlement has
been proposed in a class action lawsuit about the way that H&R Block offered refund anticipation
loans (“RALs”). If you qualify, you may send in a claim form to get money, you can exclude yourself
from the settlement, or you can object to it. The Circuit Court Of Kanawha County, West Virginia
(“the Court”) authorized this notice. Before any money is paid, the Court will have a hearing to
decide whether to approve the settlement.
What Is The Lawsuit About?
The lawsuit claimed that H&R Block violated certain state laws in the way it offered
RALs. H&R Block denies that it did anything wrong. The Court did not decide which side was right.
But both sides agreed to the settlement to resolve the case and get benefits to RAL customers. The
two sides disagree on how much money could have been won if the RAL customers who brought the suit
had won at a trial.
Who Is Included In The Settlement?
You are a Class Member if you got a RAL through an H&R Block office between 2000 and
2005 and live in one of the following jurisdictions:
Arkansas, Arizona, California, District of Columbia, Florida, Illinois, Indiana,
Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, Nevada,
Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington or Wisconsin.
You are also a Class Member if you live in one of the following states and got a RAL through
an H&R Block office during the specified years:
West Virginia — 1994 through 2005
Maryland — 1992 through 1996
Alabama — June 13, 1989 through 1996
Ohio — 2000 through 2005
Maryland — 1992 through 1996
Alabama — June 13, 1989 through 1996
Ohio — 2000 through 2005
How Do I Ask For A Payment?
You can get a detailed notice about the settlement and your rights to claim money under
it at [www.INSERTWEBADDRESS.com] or by calling toll free 1-800-000-0000. This detailed notice and
claim form package contains everything you need. The quickest way to get the notice and claim form
package is to visit the Settlement Administrator’s website:
[www.INSERTWEBADDRESS.com]
To qualify for a payment, you must send in a claim form. Claim forms must be postmarked by
June 30, 2006.
What Are Your Other Options?
If you decide to remain a member of the settlement class but do not submit a claim form,
you will not receive any money from the settlement but you will still be entitled to pursue an
individual claim against Block in an arbitration forum for a period of one year. If you don’t want
to be legally bound by the settlement, you must exclude yourself by May 1, 2006, or you won’t be
able to sue, or continue to sue, H&R Block about the legal claims in this case in any forum. If
you exclude yourself, you can’t get money from this settlement. If you stay in the settlement, you
may object to it by May 1, 2006. The detailed notice explains how to exclude yourself or object.
The Court will hold a hearing in this case on day/date/2006, to consider whether to approve the
settlement and a request by the eight law firms representing the different Class Members for an
award of attorneys’ fees and costs for investigating the facts, litigating the case, and
negotiating the settlement. You may ask to appear at the hearing, but you don’t have to. For more
information, call the Settlement Administrator toll free at
1-800-000-0000, visit the website
[www.INSERTWEBADDRESS.com], or write to the Settlement Administrator at address.
Please do not contact the Court or Block for information.
F
Exhibit F
A. Ohio Class is comprised of approximately 1,577,473 RALS and the settlement is no less than
$5,800,000.
B. Alabama/Maryland* Class is comprised of approximately 441,284 RALs as follows for no less than
$1.616.000.
| 1. | Maryland — 189,686 | ||
| 2. | Alabama — 251,598 |
C. State Law Class is comprised of approximately 13,493,522 RALs as follows for up to
$22,584,000 where each RAL is equally weighted.
| 1. | Arkansas — 336,382 | ||
| 2. | Arizona — 456,772 | ||
| 3. | California — 2,267,362 | ||
| 4. | District of Columbia — 42,854 | ||
| 5. | Florida — 1,507,174 | ||
| 6. | Illinois — 1,098,554 | ||
| 7. | Indiana — 910,136 | ||
| 8. | Massachusetts — 368,334 | ||
| 9. | Maryland — 256,781 | ||
| 10. | Maine — 135,277 | ||
| 11. | Michigan — 1,095,482 | ||
| 12. | Minnesota — 233,535 | ||
| 13. | Missouri — 643,164 | ||
| 14. | Nebraska — 159,615 | ||
| 15. | New Hampshire — 130,004 | ||
| 16. | Nevada — 192,080 | ||
| 17. | Oregon — 171,786 | ||
| 18. | Pennsylvania — 990,962 | ||
| 19. | Tennessee — 997,321 | ||
| 20. | Utah — 120,315 | ||
| 21. | Virginia — 670,956 | ||
| 22. | Washington — 334,123 | ||
| 23. | Wisconsin — 334,553 |
* Based on best available data
G
APPLICATION
FOR A REFUND ANTICIPATION LOAN AND A REFUND ACCOUNT
Applicant’s Name
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Applicant’s Social Security/Taxpayer Identification # | |
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Joint Applicant’s Name
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Joint Applicant’s Social Security/Taxpayer Identification # | |
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I am applying for a Refund Anticipation Loan (“RAL”) from HSBC Bank USA, National Association
(“HSBC”) in the maximum amount for which HSBC will approve
me. In this application (“Application”),
“ERO” means each of H&R Block, Inc. and each of its affiliates and subsidiaries (and franchisees
thereof); “Transmitter” means my electronic tax return transmitter, which may be the same as my
ERO; and “IRS” means the Internal Revenue Service.
1. IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. TO HELP THE GOVERNMENT FIGHT
THE FUNDING OF TERRORISM AND MONEY LAUNDERING ACTIVITIES, FEDERAL LAW REQUIRES ALL FINANCIAL
INSTITUTIONS TO OBTAIN, VERIFY, AND RECORD INFORMATION THAT IDENTIFIES EACH PERSON WHO OPENS AN
ACCOUNT, WHAT THIS MEANS FOR ME: WHEN I OPEN AN ACCOUNT, YOU WILL ASK
FOR MY NAME, ADDRESS, DATE OF
BIRTH, AND OTHER INFORMATION THAT WILL ALLOW YOU TO IDENTIFY ME. I MAY ALSO BE ASKED TO PRODUCE MY
DRIVER’S LICENSE OR OTHER IDENTIFYING DOCUMENTS.
2. Collections. In consideration of the ease and convenience of the following method of
paying any delinquent debt I owe or the other applicant owes to HSBC
Taxpayer Financial Services
Inc. (“HSBC TFS”), my ERO or Transmitter for prior years, or Bank One, River City Bank, First
Security Bank, Republic Bank, Santa Barbara Bank & Trust or
First Bank of Delaware (the “Other RAL
Lenders”), and provided that such debt has not been discharged in bankruptcy, I authorize and
direct the repayment of such debt, calculated as of the date of my Application, by means of (a)
having such debt deducted from the proceeds of my RAL, or (b) having my request for new loan
proceeds denied or the amount for which I have applied reduced and having such debt repaid to those
entities by offset or otherwise from my tax refund directly transmitted into my Refund Account with
HSBC. If I owe delinquent debt to more than one of the entitles listed above, I authorize and direct
HSBC to pay such debts in the following order: HSBC TFS, Other RAL Lenders, and ERO. I also
authorize and instruct HSBC, HSBC TFS, and the Other RAL Lenders to disclose to each other
information about their respective credit experiences concerning my present and
prior RALs, Refund Anticipation Checks (“RACs”) or similar financial services, and my prior tax returns.
PLEASE
NOTE: If I have delinquent debt, I understand that HSBC or its servicer may be acting as a
debt collector to collect a debt and that any information obtained will be used for that purpose.
By signing below, I am indicating that I fully understand that I am applying for a loan and that I
have read, understand and agree to the terms set forth in this Application above and on the
following pages, including but not limited to: (a) Section 2 in which I agree that HSBC may use
amounts received from my tax refund to pay certain delinquent debts;
and (b) Section 11 in which I
agree, upon my or HSBC’s election, to arbitrate any Claims that I may have. I also acknowledge that
I have 30 days from today’s date to reject the Arbitration Provision by following the procedure
described in Section 11. If I receive a RAL, I promise to pay the amount set forth in the “Total of
Payments” section on my Loan Agreement and Disclosure Statement or subsequent replacement TILA
Disclosure Statement, if any, on demand or when the anticipated refund from the IRS is
electronically deposited into my refund account, whichever comes
first, and I agree to repay the
RAL whether or not my tax refund is paid in whole or in part to HSBC.
(Applicant — Primary Taxpayer Signature)
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Date | |
(Joint Applicant — Spouse Signature, If Joint Return)
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Date | |
Witness |
HSBC Toll-Free Customer Service Number 1-800-524-0628 or visit us on the web at hsbctfshrb.com for
more information.
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3.
Applicable Law. This Application and all the other documents executed in connection with
this Application or my RAL (collectively, “Documents”) shall be governed by and construed, interpreted, and enforced in
accordance with federal law and, to the extent state law applies, the law of the State of Delaware
(without reference to conflict of laws principles).
4.
Important Information About RALs. I understand that: (a) I can file my federal income
tax return electronically without obtaining a RAL; (b) the IRS will send me a refund check or
electronically deposit my refund to my existing bank account: (c) the IRS normally sends a refund
check by mail within 3 weeks after an electronic filing; (d) the IRS normally makes an electronic
deposit in an average of about 12 days after an electronic
filing; (e) HSBC tries to make proceeds
of an instant RAL available on the day of application and a Classic RAL available on the first
business day after application; (f) HSBC cannot guarantee when any proceeds of a RAL or an IRS
refund will be available to me: and (g) a RAL may cost substantially more than other sources of
credit, and I may want to consider using other sources of credit.
5. Deposit Authorization. (a) After I sign my Application, my ERO and/or my
Transmitter will electronically transmit my tax return to the IRS and my Application to
HSBC, I understand that I will sign or authorize an IRS Transmittal Form 8453 or IRS
e-file signature authorization (“Deposit Authorization”) as
part of my Application and
electronic tax filing, and that the Deposit Authorization and this Application provide an
irrevocable agreement to have my tax refund disbursed to HSBC, and irrevocably transfers
to HSBC all of my rights, title, and interest in the proceeds of my tax refund for
purposes of the RAL I have requested and other purposes authorized by
this Application.
(b) If my Application is denied or cancelled, and HSBC receives my tax refund, HSBC will
forward to me promptly any proceeds of my refund after deducting amounts permitted by this
Agreement. (c) If for any reason, any part of the anticipated tax refund is disallowed or
offset by the IRS, or if I should receive a refund check in the mail,
I will advise HSBC
immediately and promptly pay HSBC any amounts owing with respect to my Application or a
RAL, and pay my ERO and/or my Transmitter any fees owed to them involving my tax return.
6.
Refund Account. (a) I request that a Refund Account be opened at HSBC upon receipt of
my tax refund for the purposes of ensuring the repayment of my RAL and other amounts described in
the Documents. The Annual Percentage Yield and interest rate on the
Refund Account will be 0%. This
means I will not receive any interest on funds in the Refund Account. I understand that I cannot
make withdrawals from the Refund Account and that the funds in the Refund Account will be disbursed
only as expressly provided in the Documents. (b) HSBC may deduct
any amounts I owe HSBC, my ERO, my
Transmitter or their affiliates from my tax refund, any funds received in the Refund Account, and
any proceeds of a RAL. My engagement with the ERO for services in connection with my 2004 income
tax return will end, and I am required to pay all fees to the ERO for
services rendered by the ERO, when I pick up my check for a RAL (or
when HSBC electronically transfers my proceeds to me or to another
entity at my direction). If a
check or an electronic transfer of proceeds is not made available to me because I do not receive a
tax refund, then I am required to pay all fees to the ERO for services rendered by the ERO on
demand, HSBC also may withdraw amounts deposited into the Refund Account from my tax refund to pay
any check I receive for a RAL that I endorse and present for payment or to disburse money to me in
accordance with my Application. (c) I will not receive a periodic statement for the Refund Account,
but I will receive notice if funds in the Refund Account are not
sufficient to repay my RAL or are
used for any purpose other than repayment of my RAL or disbursement to me. HSBC may, immediately
after disbursement of all funds in the Refund Account, close the account without further notice to
or authorization from me.
7.
Refund Account Fee. I will pay HSBC a fee of $24.95 for
the administration of the Refund Account and any disbursements to me from that
account (“Refund Account Fee”), I irrevocably commit to pay the Refund Account
Fee after the Deposit Authorization is filed with the IRS regardless of whether
(a) I apply for a RAL or (b) my Application is approved or denied. The Refund
Account Fee is not imposed directly or indirectly as an incident to or condition
of any extension of credit. I can avoid the Refund Account Fee if I direct that
my tax refund not be deposited to HSBC before filing my Deposit Authorization
with the IRS.
8. No Fiduciary/Agency Duty. I understand that for various fees received, my ERO is acting
only at my tax preparer (if applicable), my electronic filer and the deliverer of checks for RALs
with respect to this RAL transaction. I understand that an affiliate of my ERO may purchase an
interest in my RAL issued by HSBC. I further understand that my ERO is not acting in a fiduciary,
confidential, or agency capacity with respect to me in connection with this transaction and has no
other duties to me beyond the preparation of my tax return (if applicable), the transmission of my
tax return information to HSBC, the electronic filing of my tax return with the IRS, and the
delivery of checks for RALs. I acknowledge that I have independently evaluated and decided to apply
for a RAL, and that I am not relying on any recommendation from my ERO. I also understand that HSBC
is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection
with this transaction.
9. Disclosure Information. (a) “Information” means my 2004 federal and state income tax
returns, any information obtained in connection with my tax return (including information relating
to a possible offset of my tax refund or the possibility that my tax return is incorrect), and any
information relating to my Application or a RAL, RAC, or similar financial service I have received
or requested from HSBC. (b) “Authorized Parties” means HSBC, HSBC TFS, my ERO, my Transmitter,
and their respective affiliates and agents, and includes the Fraud Service Bureau operated for
HSBC. (c) The Authorized Parties may share Information to process my Application, to determine
whether to provide a RAL, to provide RALs to me, to collect delinquent RALs, RACs, or ERO fees, to
prevent fraud, and to otherwise administer or promote the program for RALs and RACs. (d) The
Authorized Parties may disclose information to the IRS, state tax agencies and other financial
institutions that provide RALs, RACs, or other financial services. (e) The Authorized Parties may
call, or input my Information on any website of, the IRS or state tax agencies, in connection with
my Application to, among other things, determine the status of my tax return. The IRS and state tax
agencies may disclose information about me and my tax returns to the Authorized Parties. (f) My ERO
may not use or disclose Information for any purpose, except as permitted under Treas. Reg. Sec.
301.7216-2 or as provided in this Application. (g) I consent to HSBC sharing information as
provided in the Privacy Statement.
10. Service Fees. (a) Reissued Check Fee: I agree to pay $10 each time that a check is
reissued at my request for any reason. If I request that such a check be sent by overnight mail, I
agree to pay the charges for sending it by overnight mail. (b) Document Fees If I ask HSBC to
provide me with a copy of my Application, loan agreement, billing statement or other document HSBC
may charge me $10 per document.
11. Arbitration Provision. Any claim, dispute or controversy between me and HSBC (as
specifically defined below for purposes of this Arbitration
Provision), whether in contract or tort
(intentional or otherwise), whether pre-existing, present or future, and including constitutional,
statutory, common law, regulatory, and equitable claims in any way relating to (a) any of these or
any other Documents or any RAL or RAC that I have previously requested or received from HSBC, (b)
advertisements, promotions, or oral or written statements related to this or any other Application
for a RAL or any RAL or RAC that I have previously requested or received from HSBC, (c) the
relationship of HSBC and me relating to any of these or any other Documents or any RAL or RAC that
I have previously requested or received from HSBC; and (d) except as provided below, the validity,
enforceability or scope of this Arbitration Provision or any part thereof, including but not limited
to, the issue whether any particular claim, dispute or controversy must be submitted to arbitration
(collectively the “Claim”), shall be resolved, upon the election of either me or HSBC, by binding
arbitration pursuant to this Arbitration Provision and the applicable rules of the American
Arbitration Association (“AAA”) or the National Arbitration
Forum (“NAF”) in effect at the time the Claim is filed. I shall have the right to
select one of these arbitration administrators (the “Administrator”). The arbitrator must be a
lawyer with more than ten (10) years of experience or a retired or former judge. In the event of a
conflict between this Arbitration Provision and the rules of the Administrator, this Arbitration
Provision shall govern. In the event of a conflict between this Arbitration Provision and the
balance of this Application or any other Documents, this Arbitration Provision shall govern.
Notwithstanding any language in this Arbitration Provision to the contrary, no arbitration may be
administered, without the consent of all parties to the arbitration, by any organization that has
in place a formal or informal policy that is inconsistent with and purports to override the terms
of this Arbitration Provision, including the Class Action Wavier Provision defined below.
HSBC hereby agrees not to invoke its right to arbitrate an individual Claim I may bring in
small claims court or an equivalent court, if any, so long as the
Claim is pending only in that
court. No class actions or private attorney general actions in court or in arbitration or joinder
or consolidation of claims in court or in arbitration with other persons, are permitted without the
consent of HSBC and me. The validity and effect of the preceding sentence (herein referred to as
the “Class Action Waiver Provision”) shall be determined exclusively by a court and not by the
Administrator or any arbitrator. Neither the Administrator nor any arbitrator shall have the power
or authority to waive, modify or fail to enforce the Class Action Waiver Provision, and any attempt
to do so, whether by rule, policy, arbitration decision or otherwise, shall be invalid and
unenforceable.
Any arbitration hearing that I attend will take place in a location that is reasonably
convenient for me. On any Claim I file, I will pay the first $50.00 of the filing fee. At my
request, HSBC will pay the remainder of the filing fee and any administrative or hearing fees
charged by the Administrator, up to $1,500.00 on any Claim asserted by me in the arbitration. If I
should be required to pay any additional fees to the Administrator, HSBC will consider a request by
me to pay all or part of the additional fees; however, HSBC shall not be obligated to pay any
additional fees unless the arbitrator grants me an award. If the arbitrator grants an award in my
favor, HSBC will reimburse me for any additional fees paid or owed by me to the Administrator up to
the amount of the fees that would have been charged if the original Claim had been for the amount
of the actual award in my favor. If the arbitrator issues an award in HSBC’s favor, I will not be
required to reimburse HSBC for any fees HSBC has previously paid to the Administrator or for which
HSBC is responsible.
This Arbitration Provision is made pursuant to a transaction involving interstate commerce,
and shall be governed by the Federal Arbitration Act, 9 U.S.C.
Sections 1-16 (the “FAA”). The arbitrator shall apply substantive law consistent with
the FAA, and not by any state law concerning arbitration. The arbitrator shall follow and apply
applicable substantive law to the
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extent consistent with the FAA, statutes of limitation and claims of privilege and shall be
authorized to award all remedies permitted by applicable substantive law, including, without
limitation, compensatory, statutory and punitive damages, declaratory, injunctive and other
equitable relief and attorneys’ fees and costs. The arbitrator will follow rules of procedure and
evidence consistent with the FAA, this Arbitration Provision and, to the extent consistent with
this Arbitration Provision, the Administrator’s rules Upon request of either party, the arbitrator
shall prepare a short reasoned written opinion supporting the arbitration award. Judgment upon the
award may be entered in any court having jurisdiction. The arbitrator’s award will be final and
binding except for: (a) any appeal right under the FAA: and (b) any appeal of Claims involving more
than $100,000. For such Claims, any party may appeal the award to a three-arbitrator panel
appointed by the Administrator, which will reconsider de novo (i.e., in its entirety) any aspect or
all aspects of the initial award that is appealed. The panel’s decision will be final and binding,
except for any appeal right under the FAA. Unless applicable law provides otherwise, the appealing
party will pay the appeal’s costs (i.e., the amounts owed to the Administrator and the arbitrators),
regardless of its outcome. However, HSBC will consider in good faith any reasonable request for
HSBC to bear up to the full costs of the appeal. Nothing in this Arbitration Provision shall be
construed to prevent HSBC’s use of offset or other contractual rights involving payment of my
income tax refund or other amount on deposit with HSBC to pay off any RAL, RAC, or similar
financial service, or ERO or other foes, now or thereafter owed by me to HSBC or any Other RAL
Lender or ERO or third party pursuant to the Documents or similar prior documents.
I
ACKNOWLEDGE THAT I HAVE A RIGHT TO LITIGATE CLAIMS IN COURT BEFORE A
JUDGE OR JURY, BUT I
PREFER TO RESOLVE ANY SUCH CLAIMS THROUGH ARBITRATION AND HEREBY KNOWINGLY AND VOLUNTARILY WAIVE MY
RIGHTS TO LITIGATE SUCH CLAIMS IN COURT BEFORE A JUDGE OR JURY, UPON ELECTION OF ARBITRATION BY
HSBC OR BY ME. I ACKNOWLEDGE THAT I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR
MEMBER OF ANY CLASS OF CLAIMANTS OR AS A PRIVATE ATTORNEY GENERAL PERTAINING TO ANY CLAIM SUBJECT
TO ARBITRATION. I UNDERSTAND THAT, IF I AM A MEMBER OF THE PUTATIVE
CLASS IN CUMMINS, ET AL. V. H&R
BLOCK, INC., ET AL., CASE NO. 03-C-134 IN THE CIRCUIT COURT OF
KANAWHA COURT, WV. THIS ARBITRATION
CLAUSE MAY NOT ACT AS A WAIVER OF THE RIGHTS AND CLAIMS I MAY HAVE IN THAT ACTION.
This Arbitration Provision shall supersede all prior Arbitration Provisions contained in any
previous RAL or RAC application or related agreement and shall survive repayment of any RAL or RAC
and termination of my accounts: provided, however, that if I reject this Arbitration Provision as set below, any prior Arbitration
Provisions shall remain in full force and effect. If any portion of this Arbitration Provision is
deemed invalid or unenforceable, it will not invalidate the remaining portions of this Arbitration
Provision. However, if a determination is made that the Class Action Waiver Provision is
unenforceable, this Arbitration Provision (other than this sentence) and any prior Arbitration
Provision shall be null and void.
To
reject this Arbitration Provision, I must send HSBC, c/o HSBC Taxpayer Financial Services
Inc., Account Research, P.O. Box 18097, Jacksonville, FL 32229, a signed writing (“Rejection
Notice”) that is received within thirty (30) days after the date I sign this Application. The
Rejection Notice must identify the transaction involved and must include my name, address, and
social security number and must be signed by all persons signing this Application as Applicant(s).
I may send the Rejection Notice in any manner I see fit as long as it is received at the specified
address within the specified time. No other methods can be used to reject the Arbitration
Agreement. If the Rejection Notice is sent on my behalf by a third party, such third party must
include evidence of his or her authority to submit the Rejection Notice on my behalf.
As
used in this Arbitration Provision, the term “HSBC” shall mean HSBC Bank USA, National
Association. HSBC TFS, Household Bank, f.s.b., Beneficial National Bank, and H&R Block, Inc., and
each of their parents, wholly or majority-owned subsidiaries,
affiliates, or predecessors,
successors, assigns and the franchisees of any of them, and each of their officers, directors,
agents, and employees.
Contacting
the Administrator: If I have a question about the arbitration Administrator
mentioned in this Arbitration Provision or if I would like to obtain a copy of its arbitration
rules, I can contact the Administrator as follows: American
Arbitration Association, 335 Madison
Avenue, New York, NY 10017, www.adr.org; National Arbitration Forum, P.O. Box 50191,
Minneapolis, MN 55405, www.arb-forum.com.
12.
Survival. The provisions of this Application shall survive the execution of the
Loan Agreement and Disclosure Statement and the disbursement of funds.
13.
Miscellaneous. (a) References to “I” or “me” or “my” in the Documents shall refer
individually to each applicant for a RAL and to both applicants, and the obligations of such
individuals under the Documents will be joint and several, The filing of an injured spouse form
shall not relieve either applicant of any such obligations under the Documents. (b) If any
provision of the Documents or part thereof is deemed invalid, such invalidity will not affect any
other provision of the Documents or part thereof. (c) HSBC may obtain a consumer report on me, and
other information from third parties, in connection with
evaluating
my Application, or collecting or reviewing my RAL or accounts. (d) HSBC may assign all
or a portion of any rights or obligations relating to a RAL to a third party, including HSBC TFS,
my ERO, an affiliate of my ERO, a franchiser of my ERO, or an affiliate of HSBC, without notice to
me or my consent. (e) Supervisory personnel of HSBC or its agents may listen to and record my
telephone calls. (f) I agree that you may send any notices and billing statements to the address of
the primary applicant and not to the address of the joint applicant
if such address is different.
(g) I agree HSBC may transfer, sell, participate or assign all or a portion of my RAL, and its
rights, duties and obligations relating to my RAL, to third parties, including HSBC TFS, its
affiliates, successors and assigns without notice to me or my consent.
14.
State Notices. California residents: Married persons
may apply for a separate account. Lowa Residents: NOTICE TO
CONSUMER: 1. Do not sign this paper before you read it. 2. You are
entitled to a copy of this paper. 3. You may prepay the unpaid balance at any time without penalty
and may be entitled to receive a refund of unearned charges in
accordance with the law. New York
residents: Consumer reports may be requested in connection with this account or any updates,
renewals, or extensions thereof. Upon my request, HSBC will inform me of the names and addresses of
any consumer reporting agencies which have provided HSBC with such reports. Ohio residents: The
Ohio law against discrimination requires that all creditors make credit equally available to all
creditworthy customers, and that credit reporting agencies maintain separate credit histories on
each individual upon request. The Ohio Civil Rights commission administers compliance with these
laws. Pennsylvania residents: If this loan becomes in default, HSBC or its assignee intends to
collect default charges. Utah residents: Any prepaid finance charge not exceeding 5% of the
original amount of the loan shall be fully earned on the date the loan is extended, and shall be
nonrefundable in the event the loan is repaid prior to the date it is due. Any additional prepaid
finance charge is earned proportionally over the term of the loan, and, in the event of such
prepayment, the unearned portion of such charge, calculated on a pro rata basis according to the
remaining term of the loan, shall be refunded. Wisconsin residents: No provision of a marital
property agreement, a unilateral statement under Wisconsin Stats. s. 766.59 or a court decree under
Wisconsin Stats. s. 766.70 adversely affects the interest of the creditor unless the creditor,
prior to the time the credit is granted, is furnished a copy of the agreement, statement or decree
or has actual knowledge of the adverse provision when the obligation to the creditor is incurred.
All obligations described herein are being incurred in the interest of my marriage or family. A
married Wisconsin resident applicant must mail the name and address of his or her spouse, as well
as the applicant’s name and social security number, to HSBC c/o HSBC Taxpayer Services, 200
Somerset Corporate Blvd., Bridgewater, NJ 08807, within two days.
15. Certification. I certify that the following information is true with respect to the RAL
I am requesting: (1) I do not owe any tax due and/or any tax liens from prior tax years, nor have I
previously filed a 2004 federal income tax return. (2) I do not have any delinquent child support,
alimony payments, student loans, V.A. loans or other federally sponsored loans. (3) Presently, I do
not have a petition (whether voluntary or involuntary) filed nor do I anticipate filing a petition
under federal bankruptcy laws. (4) I have not had a RAL with any lender from a prior year that has
been discharged in bankruptcy. (5) I have not paid any estimated tax and/or did not have any amount
of my 2003 refund applied to my 2004 tax return. (6) I am not
presently making regular payments to
the IRS for prior year unpaid taxes. (7) I do not have a Power of Attorney presently in effect or
on file with the Internal Revenue Service (“IRS”) to direct my federal income tax refund to any
third party. (8) I am not filing a 2004 federal Income tax return using a substitute W-2, Form
4852, or any other form of substitute wage and tax documentation, unless the source of the Form
4852 is a Military Leave and Earnings Statement. (9) I am not filing a Form 8862 (Earned Income
Credit Eligibility) with my 2004 federal income tax return. (10) I am not currently incarcerated in
a state or federal prison nor do I have 2004 income earned while an inmate at a penal institution
and claiming the Earned Income Credit. (11) The 2004 income I have reported is not solely from
Schedule C or C-EZ (Profit or Loss from Business). (12) If Schedule C is present and EIC claimed,
and return is self-prepared or other prepared, I am a statutory employee and the W-2 indicates
statutory employee in Box 15. (13) I am not filing Form 8379 (Injured Spouse Claim & Allocation)
with my 2004 federal income tax return. (14) I am not filing Form 1310 (Statement of Person
Claiming Refund Due Deceased Taxpayer) with the 2004 federal income tax return or filing a federal
income tax return Form 1040 on behalf of deceased taxpayer. (15) I do not have an amount paid with
request for an extension to file on Line 68, Field 1190 of Form 1040. (16) Everything that I have
stated in this Application is correct.
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HSBC TAXPAYER FINANCIAL SERVICES DIVISION OF HSBC BANK USA, NATIONAL ASSOCIATION
Privacy Statement
Privacy Statement
Applicability
This Privacy Statement only applies to customers’ accounts with the HSBC Taxpayer Financial
Services division of HSBC Bank USA, National Association (“HSBC”). All other HSBC accounts are
governed by the HSBC Bank USA National Association Personal Banking
Policy.
Introduction — Our Commitment to You
HSBC is proud to be part of a financial services organization that has been providing superior
products and services to its customers for many years. We greatly appreciate the trust that you and
millions of customers have placed in us, and we will protect that trust by continuing to respect
the privacy of all our applicants and customers even if our formal customer relationship ends.
How We Handle Information we Obtain
It is
important for you to know that in order to ensure that our customers get the very best
service and the highest quality products, HSBC collects demographic information (like your name and
address) and credit information (like information related to your accounts with us and others).
This information comes either directly from you, for instance, from your application and
transactions on your account; or, it may come from an outside source such as your credit bureau
report. In addition, if you visit our Internet web site, we may collect certain information about
your Internet usage.
Because some of the information we gather is not publicly available, we take great care to ensure
that this information is kept safe from unauthorized access, and we would never share the
information in violation of any regulation or law. Because we respect your privacy and we value
your trust, the only employees or companies who can access your private personal information are
those who use it to service your account or provide services to you
or to us. HSBC diligently
maintains physical, electronic and procedural safeguards that comply with applicable federal
standards to guard your private personal information and to assist us in preventing unauthorized
access to that information.
How We Share Information with Companies Affiliated with Us
From time to time, for general business purposes such as fraud control, or when we think it may
benefit you, we do share certain information with our affiliated companies, except as prohibited by
applicable law. These affiliated companies all provide financial
services, such as banking,
consumer finance, insurance, mortgage, and brokerage services. Some examples include companies
doing business under the names Household, Beneficial, or HSBC. We may also share certain
information with non-financial service providers that become affiliated with us in the future (such
as travel, auto, or shopping clubs), except us prohibited by
applicable law. The information we
share might come from your application, for instance your name, address, telephone number, social
security number, and e-mail address. Also, the information we share could include your transactions
with us or our affiliated companies (such as your account balance, payment history, and parties to
the transaction), your Internet usage, or your credit card usage. Except for Vermont residents, the
information we share could also include your assets, income, or credit reports.
How We Share Information under a Joint Marketing Agreement
We may also provide information to non-affiliated financial companies (such as a tax preparer,
mortgage banker or insurance service provider) with whom we have a joint marketing agreement. The
sharing of information with these types of companies is permitted by law. The information we may
share also comes from the sources described above and might include your name, address, phone
number, and account experience with us.
How We Share Information with Other Third Parties
Except for California or Vermont residents, we also may share information with non-affiliated
companies that are able to extend special offers we feel might be of value to you. These companies
may be financial services providers (such as mortgage bankers or insurance agents) or they may be
non-financial companies (such as retailers, tax preparers, or marketing companies). These offers
are typically for products and services that you might not otherwise hear about. The information we
may provide them comes from the sources described above and might include your name, address and
phone number. You may tell us not to share information with non-affiliated companies in this way by
completing the form below. For California and Vermont residents, applicable law requires us to
obtain your permission in order to share information about you in this way, and we have chosen not
to share your information in this way.
We may also provide information to non-affiliated companies that perform operational,
collection, or fraud control services related to your account. The sharing of information with
these types of companies is permitted by law. Such a company might include a financial company
(such as an insurance service provider) or a non-financial company (such as a data processor or
internet service provider) with whom we have an agreement. The information we may share also comes
from the sources described above and might include your name, address, phone number, and account
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H
SUMMARY NOTICE OF PENDENCY AND PROPOSED
SETTLEMENT OF CLASS ACTION AND HEARING
SETTLEMENT OF CLASS ACTION AND HEARING
If You Got A Refund Anticipation Loan From H&R
Block
This Notice Concerns Settlement Of A Lawsuit Which May Affect You
This Notice Concerns Settlement Of A Lawsuit Which May Affect You
This Notice is given pursuant to Rule 23 of the West Virginia Rules of Civil
Procedure and the
December , 2005 Order of the Circuit Court of
Kanawha County, West Virginia (“Court”) in a case called Cummins v. H&R Block, Inc., Civil Action
No. 03-C-134. A settlement has been proposed in a class action lawsuit about the way that H&R Block
offered refund anticipation loans (“RALs”). If you qualify, you may send in a claim form to get
money, you can exclude yourself from the settlement, or you can object to it. The Circuit Court Of
Kanawha County, West Virginia (“the Court”) authorized this notice. Before any money is paid, the
Court will have a hearing to decide whether to approve the settlement.
What Is The Lawsuit About?
The lawsuit claimed that H&R Block violated certain state laws in the way it offered
RALs. H&R Block denies that it did anything wrong. The Court did not decide which side was right.
But both sides agreed to the settlement to resolve the case and get benefits to RAL customers. The
two sides disagree on how much money could have been won if the RAL customers who brought the suit
had won at a trial.
Who Is Included In The Settlement?
You are a Class Member if you got a RAL through an H&R Block office between 2000 and
2005 and live in one of the following jurisdictions:
Arkansas, Arizona, California, District of Columbia, Florida, Illinois, Indiana,
Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, Nevada,
Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington or Wisconsin.
You are also a Class Member if you live in one of the following states and got a RAL through
an H&R Block office during the specified years:
West
Virginia — 1994 through 2005
Maryland — 1992 through 1996
Alabama — June 13, 1989 through 1996
Ohio — 2000 through 2005
Maryland — 1992 through 1996
Alabama — June 13, 1989 through 1996
Ohio — 2000 through 2005
How Do I Ask For A Payment?
You can get a detailed notice about the settlement and your rights to claim money under
it at [www.INSERTWEBADDRESS.com] or by calling toll free 1-800-000-0000. This detailed notice and
claim form package contains everything you need. The quickest way to get the notice and claim form
package is to visit the Settlement Administrator’s website:
[www.INSERTWEBADDRESS.com]
To qualify for a payment, you must send in a claim form. Claim forms must be postmarked
by June 30, 2006.
What Are Your Other Options?
If
you decide to remain a member of the settlement class but do not submit a claim form,
you will not receive any money from the settlement but you will still be entitled to pursue an
individual claim against Block in an arbitration forum for a period of one year. If you don’t want
to be legally bound by the settlement, you must exclude yourself by May 1, 2006, or you won’t be
able to sue, or continue to sue, H&R Block about the legal claims in this case in any forum. If
you exclude yourself, you can’t get money from this settlement. If you stay in the settlement, you
may object to it by May 1, 2006. The detailed notice explains how to exclude yourself or object.
The Court will hold a hearing in this case on day/date/2006, to consider whether to approve the
settlement and a request by the eight law firms representing the different Class Members for an
award of attorneys’ fees and costs for investigating the facts, litigating the case, and
negotiating the settlement. You may ask to appear at the hearing, but you don’t have to. For more
information, call the Settlement Administrator toll free at 1-800-000-0000, visit the website
[www.INSERTWEBADDRESS.com], or write to the Settlement Administrator at address.
Please do not contact the Court or Block for information.
If
You Got A Refund Anticipation Loan Through An H&R Block Office
Between
January 1, 1994 and December 23, 2005. You Could Get A Payment From A
Class Action Settlement
January 1, 1994 and December 23, 2005. You Could Get A Payment From A
Class Action Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights You Have And
Requires That You Make A Choice About How to Proceed.
Important Dates
To
receive a payment from the settlement your Claim Form (attached) must
be postmarked no later than June 30, 2006 (See Question 8).
If you
prefer to exclude yourself from the settlement (“opt out”),
your request must be postmarked no later than May 1, 2006 (See
Question 12).
Any notice
of appearance or objections must be received by May 1, 2006 (See
Question 16).
Date of
Fairness Hearing: day/month/2006 (See Question 13).
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
1. Why Did I Get This Notice?
|
12. | What Do I Do If I Want To Exclude Myself? |
2. What Is This Lawsuit About?
|
13. | When And Where Will The Court Decide Whether To Approve The Settlement? |
3. Why Is This A Class Action?
|
14. | Do I Have To Come To The Hearing? |
4. Why Is There A Settlement?
|
15. | What If I Do Nothing? |
5. How Do I Know If I Am Part Of The
Settlement?
|
16. | What If I Want To Object To The Settlement? |
6. What Does The Settlement Provide?
|
17. | What Is the Difference Between Excluding Myself And Objecting? |
7. How Much Will My Payments Be?
|
18. | Who Are The Lawyers For The Class? |
8. How Can I Get A Payment?
|
19. | How Will Class Counsel’s Fees And Expenses Be Paid? |
9. When Would I Get My Payment?
|
20. | Does The Class Representative Get Additional Compensation? |
10. Am I Giving Anything Up To Get A
Payment Or Stay In The Class?
|
21. | What If The Court Does Not Approve The Settlement? |
11. Can I Exclude
Myself From The Settlement
(Sometimes Called “Opting
Out”)?
|
22. | Where Do I Get Additional Information? |
-1-
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office between
January 1,1994 and December 23, 2005. You received this notice to inform you about
settlement of a class action lawsuit that may affect your rights. This notice provides
information about all of your options, so that you can evaluate those options before the
Court decides whether to approve the settlement. Those options include making a claim for
money from the settlement (see Questions 7-9), excluding yourself from the settlement
(Questions 11 & 12) or raising concerns about the fairness of the settlement (Question 16).
This package explains the lawsuit, the settlement, your legal rights, what benefits are
available, who is eligible for them, and how to get them. The Court in charge of the case
is the Circuit Court of Kanawha County, West Virginia (“the Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and various
related corporations. For simplicity, the H& R Block defendants are referred to throughout
the rest of this notice as simply “Block.” The cases were filed against Block in different
parts of the country at different times, but all essentially make the same claim — that
Block violated particular state laws in the way it made RALs available. The lawyers in
these cases have filed with the Court an Amended and Consolidated Class Action Complaint
(called the “Consolidated Action” from here on), which brings together all of the claims
made in these cases. One of the principal claims the Consolidated Action makes is that
Block violated the Credit Services Organization Acts of the affected jurisdictions, or
violated similar laws.
Block denies that it violated any laws, did anything wrong, or that anyone was harmed by
its conduct. Block nevertheless has agreed to settle the Consolidated Action solely to
avoid the burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a Settlement
of the claims in the Consolidated Action including claims that had been pending previously
in Ohio, Maryland, and Alabama. The Settlement, if approved, would resolve all litigation
involving RALs which Block sold in West Virginia between January 1,1994 and December 23,
2005. Other cases are also being settled at the same time, in the same settlement
agreement, covering legal rights of individuals in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Deadra D. Cummins,
Ivan Bell and LaDonna Bell), sue on behalf of people who have similar claims. All these people are
a Class or Class Members. One court resolves the issues for all Class Members, except for those who
exclude themselves from the Class. Circuit Court Judge Louis Bloom is in charge of this class
action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representatives and the attorneys think the settlement is best
for all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a Cummins class member. That means that
you fit the description of the class which the Court certified for this settlement. The Court
decided that everyone who fits this description is a Class Member:
All West Virginia residents who applied for and obtained a RAL through any medium, by any name,
advertised, marketed, offered or made by or through any lender through any office operating under
the trade name of “H&R Block” (including franchise or sub-franchise offices of any Settling
Defendant or Affiliate, or any H&R Block offices such as in Sears stores) from January 1,1994
through December 23, 2005, who did not previously request exclusion from the Cummins class, other
than those persons who previously requested exclusion from the Cummins class, subsequently obtained
a RAL through any Settling Defendant or Affiliate in 2005.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The Becker Class (Ohio residents) — January 1,2000 to December 23, 2005;
b.) The
Mitchell/Green Class (residents of Maryland and Alabama)
— Maryland — January 1,1992 to May
19, 2000, excluding those people who obtained RALs
after 1996
whose RAL application contains an arbitration clause; Alabama -
June 13, 1989 through
December 31, 1996;
c.) The
State Law Class (residents of 22 states and the District of Columbia) - January 1, 2000
through December 23, 2005: Arkansas, Arizona, California, District of Columbia, Florida, Illinois,
Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire,
Nevada, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington
or Wisconsin.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a
total of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The
total Block will pay is called the “common fund.”
You are a member of the Cummins class. Cummins class members are entitled to $32.5 million of the
$62.5 million, before deductions for the pro rata portion of administration costs, attorney’s fees
and expenses relating to the Cummins Class, and service fees paid to the class representatives,
Deadra D. Cummins, Ivan Bell and LaDonna Bell. The State Law class will divide more than $22.5
million; the Becker class will divide more than $5.8 million; and the Mitchell/Green (Maryland and
Alabama) class will divide over $1.6 million; all before the same deductions are made for
administration costs, attorney’s fees and expenses, and service fees applicable to each class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that Cummins Class Members send in and how many RALs you had. If every class member submitted
a claim, your share of the common fund would be a minimum of $60.90 for each RAL you obtained
during the class period. However, only a percentage of class members will actually submit claim
forms. For example, if one of every two class members return claim forms, your share of the fund
would be $121.80 for each RAL you obtained ($60.90 times two). Please remember that this is only an
example; the amount you receive from the settlement could be greater or smaller. Your share will be
reduced by whatever percentage of the common fund is taken up with administration costs, attorney’s
fees, expenses, and service payments. It is unlikely that such costs will exceed 35%, but they
could be higher or lower. The maximum amount any class member can receive is $175 for each RAL
obtained during the class period.
8. How Can I Get A Payment?
To qualify for payment, you must send in a complete and valid claim form. A claim form is attached
to this Notice. You may also get a claim form from the Settlement Administrator’s website
[[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill out the form, include all the
information the form asks for, sign it, and mail it so that it is postmarked no later than June
30, 2006. You may also email the claim form to the Settlement Administrator at [claims@
INSERTWEBADDRESS.com]. If you email the claim form, you must do so no later than midnight on June
30, 2006.
9. When Would I Get My Payment?
The Court will hold a hearing at time/date/month/2006 at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301, to decide whether to approve the settlement. If the
Court approves the settlement after that, there may be appeals. It’s always uncertain whether these
appeals can be resolved, and resolving them can take time, perhaps more than a year. The settlement
administrator will keep the settlement website at [www.INSERTWEBADDRESS.com] updated so that
everyone who is in the class may keep informed of the progress of the settlement. Please be
patient. Note: It is unlikely that you will receive your payment until six months or more after the
date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be considered a
member of the class, which means that you can’t sue, continue to sue, or be part of any other
lawsuit against Block about the legal issues in this case. Giving up your claims is called a
“release.” Unless you exclude yourself from the settlement, you will release your claims whether or
not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made in other
currently existing class actions that relate to the RAL or other products and services offered by
Block are not released. Claims under state law based solely on allegations that a tax preparer
failed (A) to properly prepare a tax return or (B) to maintain the confidentiality of taxpayer
information resulting in injury based on “stolen identity” or similar misuse of taxpayer
information or theft of a RAL check; and claims to enforce the terms and conditions of the
Settlement Agreement, are similarly not released.
Class members who do not exclude themselves, but do not make a claim for money from this settlement
may choose to arbitrate their individual claims
against Block for another year after the settlement is finalized. Although Class Counsel recommend
this settlement, they take no position on your likelihood of succeeding on an individual basis in
an arbitration case. You should obtain independent legal help if you need more information about
the economic value of the arbitration alternative to excluding yourself or making a claim for money
under the settlement.
The settlement requires Block to follow certain business practices with future RALs, and provides
Block with an incentive to register as a Credit Service Organization (“CSO”) in the jurisdictions
covered by the settlement. Block has two years to decide whether to register and come into
compliance with the various CSO statutes.
Important: If you decide to go back to Block to obtain a RAL during the two-year period Block has
to register as a CSO in the various jurisdictions, and Block does register and comply with your
jurisdiction’s CSO statute in that two-year period, then you will not be able to sue Block for any
new RAL violation that you claim happened during the two-year period. But, if Block does not
register as a CSO and comply with the CSO statute in your jurisdiction, you will be able to sue
based on any new RAL violation that you claimed happened during that period. In addition, any
deadline on when you can sue Block (called the “statute of limitations”) will be suspended for the
two-year period.
11. Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you will not
receive any payment from the common fund, you will not release any claims you may have against
Block, and you will not be bound by anything that happens in the Consolidated Action. If you opt
out, you will be free to pursue whatever legal rights you may have by pursuing your own lawsuit
against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins, v. H&R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The
Settlement?
The Court will hold a Fairness Hearing on time/date/at the Kanawha County Judicial Annex, 111 Court
Street, Charleston, West Virginia 25301. At this
hearing the Court will consider whether the settlement is fair, reasonable, and adequate. If there
are objections, the Court will consider them. The Court will listen to people who have asked to
speak at the hearing. The Court may also decide how much to pay to Class Counsel. After the
hearing, the Court will decide whether to approve the settlement. We do not know how long these
decisions will take. The hearing can be continued at any time by the Court without any further
notice to you.
14. Do I Have To Come To The Hearing?
No. You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1, 2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H &R Block, Inc., Civil Action No. 03-C-134). Your letter must be
received in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian A.Glasser, Esq.
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
227 Capitol Street
Charleston, WV 25301
(ii) Defendants’ Counsel: |
||
Matthew M. Neumeier
|
Charles R. Bailey | |
Jenner & Block LLP
|
Bailey & Wyant PLLC | |
One IBM Plaza
|
P.O. Box 3710 | |
Chicago, IL 60611
|
Charleston, WV 25337-3710 |
(iii) The Court:
Clerk of Court
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you
exclude yourself, you have no basis to object because the case no longer affects you. Objecting is
telling the Court that you don’t like something about the settlement and you don’t want the Court
to approve it. You can object only if you stay in the Class.
18.
Who Are The Lawyers For The Cummins Class?
The Court has appointed the following law firm to represent you and other Cummins Class Members.
These lawyers are called Class Counsel. If you want to be represented by your own lawyer, you may
hire one at your own expense.
Brian A. Glasser
H.F. Salsbery
John W. Barrett
Eric B. Snyder
Bailey & Glasser LLP
227 Capitol Street
Charleston, WV 25301
H.F. Salsbery
John W. Barrett
Eric B. Snyder
Bailey & Glasser LLP
227 Capitol Street
Charleston, WV 25301
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’ fees and
expenses in an amount not more than one-third of the portion of the common fund attributable to the
Cummins Class. The fees would pay Class Counsel for investigating the facts, litigating the case,
and negotiating
the settlement. The Court will determine the amount of any fees and expenses awarded to
Class Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. The Cummins class representatives will seek a service award in an amount to be
determined by the Court.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and reasonable,
the Settlement Agreement will be null and void, and all parties will be returned to their
respective pre-Settlement status in the various lawsuits that the proposed Settlement hopes to
resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about the
settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact Cummins Class Counsel.
Please Do Not Contact The Court Or Block For information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Circuit Judge
Kanawha County, West Virginia
Dated:
, 2005
If You Got A Refund Anticipation Loan Through An H&R Block Office Between January 1,
2000 And December 23, 2005, You Could Get A Payment From A
Class Action Settlement
2000 And December 23, 2005, You Could Get A Payment From A
Class Action Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights You Have And
Requires That You Make A Choice About How to Proceed.
Important Dates
To
receive a payment from the settlement your Claim Form (attached) must
be postmarked no later than June 30, 2006 (See Question 8).
If you
prefer to exclude yourself from the settlement (“opt out”),
your request must be postmarked no later than May 1, 2006 (See
Question 12).
Any notice
of appearance or objections must be received by May 1, 2006 (See
Question 16).
Date of
Fairness Hearing: day/month/2006 (See Question 13).
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
1. Why Did I Get This Notice?
|
12. | What Do I Do If I Want To Exclude Myself? |
2. What Is This Lawsuit About?
|
13. | When And Where Will The Court Decide Whether To Approve The Settlement? |
3. Why Is This A Class Action?
|
14. | Do I Have To Come To The Hearing? |
4. Why Is There A Settlement?
|
15. | What If I Do Nothing? |
5. How Do I Know If I Am Part Of
The Settlement?
|
16. | What If I Want To Object To The Settlement? |
6. What Does The Settlement Provide?
|
17. | What Is the Difference Between Excluding Myself And Objecting? |
7. How Much Will My Payments Be?
|
18. | Who Are The Lawyers For The Class? |
8. How Can I Get A Payment?
|
19. | How Will Class Counsel’s Fees And Expenses Be Paid? |
9. When Would I Get My Payment?
|
20. | Does The Class Representative Get Additional Compensation? |
10. Am I Giving Anything Up To Get A
Payment Or Stay In The Class?
|
21. | What If The Court Does Not Approve The Settlement? |
-1-
| 11. | Can I Exclude Myself
From The Settlement (Sometimes
Called “Opting Out”)?
|
22. Where Do I Get Additional Information? |
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office between
January 1, 2000 and December 23, 2005. You received this notice to inform you about
settlement of a class action lawsuit that may affect your rights. This notice provides
information about all of your options, so that you can evaluate those options before the
Court decides whether to approve the settlement. Those options include making a claim for
money from the settlement (see Questions 7-9), excluding yourself from the settlement
(Questions 11 & 12) or raising concerns about the fairness of the settlement (Question 16).
This package explains the lawsuit, the settlement, your legal rights, what benefits are
available, who is eligible for them, and how to get them. The Court in charge of the case
is the Circuit Court of Kanawha County, West Virginia (“the Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and various
related corporations. For simplicity, the H& R Block defendants are referred to throughout
the rest of this notice as simply “Block.” The cases were filed against Block in different
parts of the country at different times, but all essentially make the
same claim – that
Block violated particular state laws in the way it made RALs available. The lawyers in
these cases have filed with the Court an Amended and Consolidated Class Action Complaint
(called the “Consolidated Action” from here on), which brings together all of the claims
made in these cases. One of the principal claims the Consolidated Action makes is that
Block violated the Credit Services Organization Acts of the affected jurisdictions, or
violated similar laws.
Block denies that it violated any laws, did anything wrong, or that anyone was harmed by its
conduct. Block nevertheless has agreed to settle the Consolidated Action solely to avoid the
burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a Settlement
of the claims in the Consolidated Action including claims that had been pending previously
in Ohio, Maryland, and Alabama. The Settlement, if approved, would resolve all litigation
involving RALs which Block sold in Ohio between January 1, 2000
and December 23, 2005. Other
cases are also being settled at the same time, in the same settlement agreement, covering
legal rights of individuals in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Lynn Becker), sue
on behalf of people who have similar claims. All these people are a Class or Class Members. One
court resolves the issues for all Class Members, except for those who exclude themselves from the
Class. Circuit Court Judge Louis Bloom is in charge of this class action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representative and the attorneys think the settlement is best for
all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a Becker class member. That means that
you fit the description of the class which the Court certified for this settlement. The Court
decided that everyone who fits this description is a Class Member:
All Ohio residents who applied for and obtained a RAL through any medium, by any name, advertised,
marketed, offered or made by or through any lender through any office operating under the trade
name of “H&R Block” (including franchise or sub-franchise offices of any Settling Defendant or
Affiliate, as defined herein, or any H&R Block offices such as in Sears stores) from January 1,
2000 through December 23, 2005.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The Cummins Class (West Virginia residents) — January 1, 1994 to December 23, 2005;
b.) The Mitchell/Green Class (residents of Maryland and Alabama) — Maryland — January 1, 1992 to May
19, 2000, excluding those people who obtained RALs after 1996 whose RAL application contains an
arbitration clause; Alabama — June 13, 1989 through December 31, 1996;
c.) The State Law Class (residents of 22 states and the District of Columbia) — January 1, 2000
through December 23, 2005: Arkansas, Arizona, California, District of Columbia, Florida, Illinois,
Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire,
Nevada, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington or Wisconsin.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a total
of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The total
Block will pay is called the “common fund.”
You are a member of the Becker class. Becker class members are entitled to more than $5.8 million
of the $62.5 million, before deductions for the pro rata portion of administration costs,
attorney’s fees and expenses relating to the Becker Class, and service fees paid to the class
representative, Lynn Becker. The Cummins class members will divide $32.5 million; the State Law
class will divide more than $22.5 million; and the Mitchell/Green (Maryland and Alabama) class will
divide more than $1.6 million; all before the same deductions are made for administration costs,
attorney’s fees and expenses, and service fees applicable to each class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that Becker Class Members send in and how many RALs you had. If every class member submitted
a claim, your share of the common fund would be a minimum of $3.66 for each RAL you obtained during
the class period. However, only a percentage of class members will actually submit claim forms.
For example, if only one of every four class members return claim forms, your share of the fund
would be $14.64 for each RAL you obtained ($3.66 times four). Your share will be reduced by
whatever percentage of the common fund is taken up with administration costs, attorney’s fees,
expenses, and service payments. It is unlikely that such costs will exceed 30%, but they could be
higher or lower. Please remember that this is only an example; the amount you receive from the
settlement could be greater or smaller.
8. How Can I Get A Payment?
To qualify for payment, you must send in a complete and valid claim form. A claim form is attached
to this Notice. You may also get a claim form from the Settlement Administrator’s website
[[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill out the form, include all the
information the form asks for, sign it, and mail it so that it is postmarked no later than June 30,
2006. You may also email the claim form to the Settlement Administrator at [claims@
INSERTWEBADDRESS.com]. If you email the claim form, you must do so no later than midnight on June
30, 2006.
9. When Would I Get My Payment?
The Court will hold a hearing at time/date/month/2006 at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301, to decide whether to approve the settlement. If the
Court approves the settlement after that, there may be appeals. It’s always uncertain whether these
appeals can be resolved, and resolving them can take time, perhaps more than a year. The settlement
administrator will keep the settlement website at [www.INSERTWEBADDRESS.com] updated so that
everyone who is in the class may keep informed of the progress of the settlement. Please be
patient. Note: It is unlikely that you will receive your payment until six months or more after the
date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be considered a
member of the class, which means that you can’t sue, continue to sue, or be part of any other
lawsuit against Block about the legal issues in this case. Giving up your claims is called a
“release.” Unless you exclude yourself from the settlement, you will release your claims whether or
not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made in other
currently existing class actions that relate to the RAL or other products and services offered by
Block are not released. Claims under state law based solely on allegations that a tax preparer
failed (A) to properly prepare a tax return or (B) to maintain the confidentiality of taxpayer
information resulting in injury based on “stolen identity” or similar misuse of taxpayer
information or theft of a RAL check; and claims to enforce the terms and conditions of the
Settlement Agreement, are similarly not released.
Class members who do not exclude themselves, but do not make a claim for money from this settlement
may choose to arbitrate their individual claims against Block for another year after the settlement
is finalized. Although Class Counsel recommend this settlement, they take no position on your
likelihood of succeeding on an individual basis in an arbitration case. You should obtain
independent legal help if you need more information about the economic value of the arbitration
alternative to excluding yourself or making a claim for money under the settlement.
The settlement requires Block to follow certain business practices with future RALs, and provides
Block with an incentive to register as a Credit Service Organization (“CSO”) in the jurisdictions
covered by the settlement. Block has two years to decide whether to register and come into
compliance with the various CSO statutes.
Important: If you decide to go back to Block to obtain a RAL during the two-year period Block has
to register as a CSO in the various jurisdictions, and Block does register and comply with your
jurisdiction’s CSO statute in that two-year period, then you will not be able to sue Block for any
new RAL violation that you claim happened during the two-year period. But, if Block does not
register as a CSO and comply with the CSO statute in your jurisdiction, you will be able to sue
based on any new RAL violation that you claimed happened during that period. In addition, any
deadline on when you can sue Block (called the “statute of limitations”) will be suspended for the
two-year period.
11. Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you will not
receive any payment from the common fund, you will not release any claims you may have against
Block, and you will not be bound by anything that happens in the Consolidated Action. If you opt
out, you will be free to pursue whatever legal rights you may have by pursuing your own lawsuit
against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins, v. H & R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The
Settlement?
Settlement?
The Court will hold a Fairness Hearing on time/date/ at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301. At this hearing the Court will consider whether the
settlement is fair, reasonable, and adequate. If there are objections, the Court will consider
them. The Court will listen to people who have asked to speak at the hearing. The Court may also
decide how much to pay to Class Counsel. After the hearing, the Court will decide whether to
approve the settlement. We do not know now long these decisions will take. The hearing can be
continued at any time by the Court without any further notice to you.
14. Do I Have To Come To The Hearing?
No. You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1, 2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H & R Block, Inc., Civil Action No. 03-C-134). Your letter must be
received in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian A.Glasser, Esq.
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
227 Capitol Street
Charleston, WV 25301
(ii) Defendants’ Counsel: |
||
Matthew M. Neumeier
|
Charles R. Bailey | |
Jenner & Block LLP
|
Bailey & Wyant PLLC | |
One IBM Plaza
|
P.O. Box 3710 | |
Chicago, IL 60611
|
Charleston, WV 25337-3710 |
(iii) The Court:
Clerk of Court
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you exclude
yourself, you have no basis to object because the case no longer affects you. Objecting is telling
the Court that you don’t like something about the settlement and you don’t want the Court to
approve it. You can object only if you stay in the Class.
18. Who Are The Lawyers For The Becker Class?
The Court has appointed the following law firms to represent you and other Becker Class Members.
These lawyers are called Class Counsel. If you want to be represented by your own lawyer, you may
hire one at your own expense.
Ronald Frederick
|
John Roddy | |
Ronald Frederick & Assoc., LLC
|
Gary Klein | |
55 Public Square, Suite 1300
|
Elizabeth Ryan | |
Cleveland, Ohio 44113
|
Roddy, Klein & Ryan | |
| 727 Atlantic Avenue | ||
| Boston, MA 02111 |
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’ fees and
expenses in an amount not more than 25% of the portion of the common fund attributable to the
Becker Class. The fees would pay Class Counsel for investigating the facts, litigating the case,
and negotiating the
settlement. The Court will determine the amount of any fees and expenses awarded to Class
Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. Lynn Becker will seek a “service award” of $5,000. The Court will determine
whether Ms. Becker receives a “service award” and the amount of that award.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and reasonable,
the Settlement Agreement will be null and void, and all parties will be returned to their
respective pre-Settlement status in the various lawsuits that the proposed Settlement hopes to
resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about the
settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact Becker Class Counsel.
Please Do Not Contact The Court Or Block For Information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Circuit Judge
Kanawha County, West Virginia
Dated: , 2005
If You Got A Refund Anticipation Loan Through An H&R Block Office In Maryland Between
January 1, 1992 And December 31, 1996, Or In Alabama from June 13, 1989 through December
31, 1996. You Could Get A Payment From A Class Action Settlement
January 1, 1992 And December 31, 1996, Or In Alabama from June 13, 1989 through December
31, 1996. You Could Get A Payment From A Class Action Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights You Have And
Requires That You Make A Choice About How to Proceed.
Important Dates
To
receive a payment from the settlement your Claim Form (attached) must
be postmarked no later than June 30, 2006 (See Question 8).
If you
prefer to exclude yourself from the settlement (“opt out”),
your request must be postmarked no later than May 1, 2006 (See
Question 12).
Any notice
of appearance or objections must be received by May 1, 2006 (See
Question 16).
Date of
Fairness Hearing: day/month/2006 (See Question 13).
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
1. Why Did I Get This Notice?
|
12. What Do I Do If I Want To Exclude Myself? | |
2. What Is This Lawsuit About?
|
13. When And Where Will The Court Decide Whether To Approve The Settlement? | |
3. Why Is This A Class Action?
|
14. Do I Have To Come To The Hearing? | |
4. Why Is There A Settlement?
|
15. What If I Do Nothing? | |
5. How Do I Know If I Am Part Of The
Settlement?
|
16. What If I Want To Object To The Settlement? | |
6. What Does The Settlement Provide?
|
17. What Is the Difference Between Excluding Myself And Objecting? | |
7. How Much Will My Payments Be?
|
18. Who Are The Lawyers For The Class? | |
8. How Can I Get A Payment?
|
19. How Will Class Counsel’s Fees And Expenses Be Paid? | |
9. When Would I Get My Payment?
|
20. Does The Class Representative Get Additional Compensation? | |
10. Am I Giving Anything Up To Get A Payment Or Stay In The Class?
|
21. What If The Court Does Not Approve The Settlement? | |
11. Can I Exclude Myself From The
Settlement (Sometimes Called
“Opting Out”)?
|
22. Where Do I Get Additional Information? |
-1-
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office in
Maryland between January 1, 1992 and December 31, 1996, or through an H&R Block office in
Alabama between June 13, 1989 and December 31, 1996. You received this notice to inform you
about settlement of a class action lawsuit that may affect your rights. This notice
provides information about all of your options, so that you can evaluate those options
before the Court decides whether to approve the settlement. Those options include making a
claim for money from the settlement (see Questions 7-9), excluding yourself from the
settlement (Questions 11 & 12) or raising concerns about the fairness of the settlement
(Question 16). This package explains the lawsuit, the settlement, your legal rights, what
benefits are available, who is eligible for them, and how to get them. The Court in charge
of the case is the Circuit Court of Kanawha County, West Virginia (“the Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and various
related corporations. For simplicity, the H& R Block defendants are referred to throughout
the rest of this notice as simply “Block.” The cases were filed against Block in different
parts of the country at different times, but all essentially make the same claim — that
Block violated particular state laws in the way it made RALs available. The lawyers in
these cases have filed with the Court an Amended and Consolidated Class Action Complaint
(called the “Consolidated Action” from here on), which brings together all of the claims
made in these cases. One of the principal claims the Consolidated Action makes is that
Block violated the Credit Services Organization Acts of the affected jurisdictions, or
violated similar laws.
Block denies that it violated any laws, did anything wrong, or that anyone was harmed by
its conduct. Block nevertheless has agreed to settle the Consolidated Action solely to
avoid the burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a
Settlement of the claims in the Consolidated Action including claims that had been pending
previously in Ohio, Maryland, and Alabama. The Settlement, if approved, would resolve all
litigation involving RALs which Block sold in Alabama between
June 13, 1989 and December
31, 1996, and in Maryland between January 1, 1992 and
December 31, 1996. Other cases are also
being settled at
the same time, in the same settlement agreement, covering legal rights of individuals
in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Levon Mitchell
and Geral Mitchell of Alabama, and Joyce A. Green of Maryland) sue on behalf of people who have
similar claims. All these people are a Class or Class Members. One court resolves the issues for
all Class Members, except for those who exclude themselves from the Class. Circuit Court Judge
Louis Bloom is in charge of this class action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representatives and the attorneys think the settlement is best
for all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a Mitchell/Green class member. That
means that you fit the description of the class which the Court certified for this settlement. The
Court decided that everyone who fits this description is a Class Member:
All Maryland residents who applied for and obtained a RAL at any H&R Block office in Maryland from
January 1, 1992 through December 31, 1996 and did not thereafter apply for and obtain a RAL subject
to an arbitration provision, and all individuals who obtained a RAL
from June 13, 1989 through
December 31, 1996 through any “H&R Block” office in Alabama for which the Settling Defendants herein
received a license fee payment or portion of the finance charge, and who did not previously request
exclusion from their respective classes that were previously certified or timely request exclusion
from this class.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The
Cummins Class (West Virginia residents) — January 1, 1994 to December 23, 2005;
b.) The
Becker Class (residents of Ohio) — January 1, 2000 to December 23, 2005
c.) The
State Law Class (residents of 22 states and the District of Columbia)
—January 1, 2000
through December 23, 2005: Arkansas, Arizona, California, District of Columbia, Florida, Illinois,
Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire,
Nevada, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington or Wisconsin.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a total
of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The total
Block will pay is called the “common fund.”
You are a member of the Mitchell/Green class. Mitchell/Green class members are entitled to over
$1.6 million of the $62.5 million, before deductions for the pro rata portion of administration
costs, attorney’s fees and expenses relating to the Mitchell/Green class, and service fees paid to
the class representatives, Joyce A. Green, Levon Mitchell and Geral Mitchell. The Cummins class
members will divide $32.5 million; the State Law class will divide more than $22.5 million; and the
Becker class will divide more than $5.8 million; all before the same deductions are made for
administration costs, attorney’s fees and expenses, and service fees applicable to each class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that Mitchell/Green Class Members send in and how many RALs you had. If every class member
submitted a claim, your share of the common fund would be a minimum of $3.66 for each RAL you
obtained during the class period. However, only a percentage of class members will actually
submit claim forms. For example, if only one of every four class members return claim forms, your
share of the fund would be $14.64 for each RAL you obtained ($3.66 times four). Your share will be
reduced by whatever percentage of the common fund is taken up with administration costs, attorney’s
fees, expenses, and service payments. It is unlikely that such costs will exceed 30%, but they
could be higher or lower. Please remember that
this is only an example; the amount you receive from the settlement could be greater or smaller.
8. How Can I Get A Payment?
To qualify for payment, you must send in a complete and valid claim form. A claim form is
attached to this Notice. You may also get a claim form from the Settlement Administrator’s website
[[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill out the form, include all the
information the form asks for, sign it, and mail it so that it is
postmarked no later than June 30, 2006. You may also email the claim form to the Settlement
Administrator at [claims@INSERTWEBADDRESS.com]. If you email the claim form, you must do so no later than midnight on June
30, 2006.
9. When Would I Get My Payment?
The Court will hold a hearing at time/date/month/2006 at the Kanawha County Judicial Annex,
111 Court Street, Charleston, West Virginia 25301, to decide whether to approve the settlement. If
the Court approves the settlement after that, there may be appeals. It’s always uncertain whether
these appeals can be resolved, and resolving them can take time, perhaps more than a year. The
settlement administrator will keep the settlement website at [www.INSERTWEBADDRESS.com] updated so
that everyone who is in the class may keep informed of the progress of the settlement. Please be
patient. Note: It is unlikely that you will receive your payment until six months or more after the
date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be
considered a member of the class, which means that you can’t sue, continue to sue, or be part of
any other lawsuit against Block about the legal issues in this case. Giving up your claims is
called a “release.” Unless you exclude yourself from the settlement, you will release your claims
whether or not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made in other
currently existing class actions that relate to the RAL or other products and services offered by
Block are not released. Claims under state law based solely on allegations that a tax prepare
failed (A) to properly prepare a tax return or (B) to maintain the confidentiality of taxpayer
information resulting in injury based on “stolen identity” or similar misuse of taxpayer
information or theft of a RAL check; and claims to enforce the terms and conditions of the
Settlement Agreement, are similarly not released.
Class members who do not exclude themselves, but do not make a claim for money from this settlement
may choose to arbitrate their individual claims
against Block for another year after the settlement is finalized. Although Class Counsel
recommend this settlement, they take no position on your likelihood of succeeding on an individual
basis in an arbitration case. You should obtain independent legal help if you need more information
about the economic value of the arbitration alternative to excluding yourself or making a claim for
money under the settlement.
The settlement requires Block to follow certain business practices with future RALs.
11. Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you will not
receive any payment from the common fund, you will not release any claims you may have against
Block, and you will not be bound by anything that happens in the Consolidated Action. If you opt
out, you will be free to pursue whatever legal rights you may have by pursuing your own lawsuit
against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins. v. H &
R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The Settlement?
The Court will hold a Fairness Hearing on time/date/ at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301. At this hearing the Court will consider whether the
settlement is fair, reasonable, and adequate. If there are objections, the Court will consider
them. The Court will listen to people who have asked to speak at the hearing. The Court may also
decide how much to pay to Class Counsel. After the hearing, the Court will decide whether to
approve the settlement. We do not know how long these decisions will take. The hearing can be
continued at any time by the Court without any further notice to you.
14. Do I Have To Come To The Hearing?
No. You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of
Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1, 2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H & R Block, Inc., Civil Action No. 03-C-134). Your letter must be
received in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian A.Glasser, Esq.
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
(ii) Defendants’ Counsel:
Matthew M. Neumeier
|
Charles R. Bailey | |
Jenner & Block LLP
|
Bailey & Wyant PLLC | |
One IBM Plaza
|
P.O. Box 3710 | |
Chicago, IL 60611
|
Charleston, WV 25337-3710 |
(iii) The Court:
Clerk of Court
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you
exclude yourself, you have no basis to object because the case no longer affects you. Objecting
is telling the Court that you don’t like something about the settlement and you don’t want the
Court to approve it. You can object only if you stay in the Class.
18.
Who Are The Lawyers For The Mitchell/Green Class?
The Court has appointed the following law firms to represent you and other Mitchell/Green Class
Members. These lawyers are called Class Counsel. If you want to be represented by your own
lawyer, you may hire one at your own expense.
Steven E. Angstreich, Esq.
|
Steven A. Martino, Esq. | |
Michael Coren, Esq.
|
Frederick T. Kuykendall, III, Esq. | |
Carolyn C. Lindheim, Esq.
|
W. Lloyd Copeland, Esq. | |
Levy Angstreich Finney Baldante
|
Taylor, Martino & Kuykendall | |
Rubenstein & Coren, P.C.
|
51 St. Joseph Street | |
1616 Walnut Street, 5thFloor
|
Mobile, AL 36602 | |
Philadelphia, PA 19103 |
Charles J. Piven, Esq.
Law Office of Charles J. Piven, P.A.
The World Trade Center— Baltimore
401 East Pratt Street, Suite 2525
Baltimore, Maryland 21202
Law Office of Charles J. Piven, P.A.
The World Trade Center— Baltimore
401 East Pratt Street, Suite 2525
Baltimore, Maryland 21202
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’
fees and expenses in an amount not more than 25% of the portion of the common fund attributable to
the Mitchell/Green Class. The fees would pay Class Counsel for investigating the facts, litigating
the case, and negotiating the settlement. The Court will determine the amount of any fees and
expenses awarded to Class Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. Joyce A. Green, Levon Mitchell and Geral Mitchell will seek a “service award”
of $5,000. The Court will determine whether they receive a “service award” and the amount of that
award.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and
reasonable, the Settlement Agreement will be null and void, and all parties will be returned to
their respective pre-Settlement status in the various lawsuits that the proposed Settlement
hopes to resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about
the settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact Mitchell/Green Class
Counsel.
Please
Do Not Contact The Court Or Block For Information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Circuit Judge
Kanawha County, West Virginia
Dated: ,
2005
If You Got A Refund Anticipation Loan Through An H&R Block Office Between
January 1, 2000 and December 23, 2005. You Could Get A Payment From A
Class Action Settlement
January 1, 2000 and December 23, 2005. You Could Get A Payment From A
Class Action Settlement
A Court Has Authorized This Notice. Please Read It, It Describes Important Rights
You Have And Requires That You Make A Choice About How to Proceed.
You Have And Requires That You Make A Choice About How to Proceed.
Important Dates
To
receive a payment from the settlement your Claim Form (attached) must
be postmarked no later than June 30, 2006 (See Question 8).
If you
prefer to exclude yourself from the settlement (“opt out”),
your request must be postmarked no later than May 1, 2006 (See
Question 12).
Any notice
of appearance or objections must be received by May 1, 2006 (See
Question 16).
Date of
Fairness Hearing: day/month/2006 (See Question 13).
ANSWERS TO FREQUENTLY-ASKED QUESTIONS
1.
|
Why Did I Get This Notice? | 12. | What Do I Do If I Want To Exclude Myself? | |||||
2.
|
What Is This Lawsuit About? | 13. | When And Where Will The Court Decide Whether To Approve The Settlement? | |||||
3.
|
Why Is This A Class Action? | 14. | Do I Have To Come To The Hearing? | |||||
4.
|
Why Is There A Settlement? | 15. | What If I Do Nothing? | |||||
5.
|
How Do I Know If I Am Part Of The Settlement? | 16. | What If I Want To Object To The Settlement? | |||||
6.
|
What Does The Settlement Provide? | 17. | What Is the Difference Between Excluding Myself And Objecting? | |||||
7.
|
How Much Will My Payments Be? | 18. | Who Are The Lawyers For The Class? | |||||
8.
|
How Can I Get A Payment? | 19. | How Will Class Counsel’s Fees And Expenses Be Paid? | |||||
9.
|
When Would I Get My Payment? | 20. | Does The Class Representative Get Additional Compensation? | |||||
10.
|
Am I Giving Anything Up To Get A Payment Or Stay In The Class? | 21. | What If The Court Does Not Approve The Settlement? |
11
|
Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)? | 22. | Where Do I Get Additional Information? |
- 1 -
1. Why Did I Get This Notice?
You got at least one Refund Anticipation Loan (“RAL”) through an H&R Block office between
January 1, 2000 and December 23, 2005. You received this notice to inform you about
settlement of a class action lawsuit that may affect your rights. This notice provides
information about all of your options, so that you can evaluate those options before the
Court decides whether to approve the settlement. Those options include making a claim for
money from the settlement (see Questions 7-9), excluding yourself from the settlement
(Questions 11 & 12) or raising concerns about the fairness of the settlement (Question
16). This package explains the lawsuit, the settlement, your legal rights, what benefits
are available, who is eligible for them, and how to get them. The Court in charge of the
case is the Circuit Court of Kanawha County, West Virginia (“the Court”).
2. What Is This Lawsuit About?
This case combines several lawsuits that were filed against H&R Block, Inc. and various
related corporations. For simplicity, the H & R Block defendants are referred to
throughout the rest of this notice as simply “Block.” The cases were filed against Block
in different parts of the country at different times, but all essentially make the same
claim — that Block violated particular state laws in the way it made RALs available. The
lawyers in these cases have filed with the Court an Amended and Consolidated Class Action
Complaint (called the “Consolidated Action” from here on), which brings together all of
the claims made in these cases. One of the principal claims the Consolidated Action makes
is that Block violated the Credit Services Organization Acts of the affected
jurisdictions, or violated similar laws.
Block denies that it violated any laws, did anything wrong, or that anyone was harmed by
its conduct. Block nevertheless has agreed to settle the Consolidated Action solely to
avoid the burden, expense, risk and uncertainty of continuing the various lawsuits.
Block and the plaintiffs in the Consolidated Actions have reached agreement on a
Settlement of the claims in the Consolidated Action including claims that had been pending
previously in Ohio, Maryland, and Alabama. The Settlement, if approved, would resolve all
litigation involving RALs which Block sold in Arkansas, Arizona, California, District of
Columbia, Florida, Illinois, Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota,
Missouri, Nebraska, New Hampshire, Nevada, Oregon, Pennsylvania, Tennessee, Utah,
Virginia, Washington and Wisconsin between January 1, 2000 and December 23, 2005.
Other cases are also being settled at the same time, in the same settlement agreement,
covering legal rights of individuals in a number of other jurisdictions.
3. Why Is This A Class Action?
In a class action, one or more people called Class Representatives (in this case Renea Griffith,
Maryanne Hoekman and Justin Sevey), sue on behalf of people who have similar claims. All these
people are a Class or Class Members. One court resolves the issues for all Class Members, except
for those who exclude themselves from the Class. Circuit Court Judge Louis Bloom is in charge of
this class action.
4. Why Is There A Settlement?
The Court did not decide in favor of Block or any of the Plaintiffs in the various lawsuits. The
Plaintiffs in those lawsuits think they could have won if they went to trial. Block thinks the
Plaintiffs would have lost. In fact, in most cases, Block thinks that the Plaintiffs would not have
even been able to continue their cases in court, because Block’s RAL contract required them to try
their claims before an arbitrator. But there was no trial and no arbitration. Instead, both sides
agreed to a settlement. This avoids the cost of a trial, and the people affected have an
opportunity to be paid. The Class Representatives and the attorneys think the settlement is best
for all Class Members.
5. How Do I Know If I Am Part Of The Settlement?
You received this notice because records identified you as a State Law class member. That means
that you fit the description of the class which the Court certified for this settlement. The Court
decided that everyone who fits this description is a Class Member:
All residents of Arkansas, Arizona, California, District of Columbia, Florida, Illinois, Indiana,
Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, Nevada,
Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington and Wisconsin who applied for and
obtained a RAL through any medium, by any name, advertised, marketed, offered or made by or through
any lender through any office operating under the trade name of “H&R Block” (including franchise or
sub-franchise offices of any Settling Defendant or Affiliate, or any H&R Block offices such as in
Sears stores) from January 1, 2000 through December 23, 2005.
There are three other classes that are part of the overall Settlement. The following classes are
composed of people who live in one of the following jurisdictions and got a RAL through an H&R
Block office during the specified years:
a.) The Cummins Class (West Virginia residents) — January 1, 1994 to December 23, 2005;
b.) The
Mitchell/Green Class (residents of Maryland and Alabama)
— Maryland — January 1, 1992
to May 19, 2000, excluding those people who obtained RALs after 1996 whose RAL application contains
an arbitration clause; Alabama — June 13, 1989 through December 31, 1996;
c.) The
Becker Class (residents of Ohio) — January 1, 2000 through December 23, 2005.
6. What Does The Settlement Provide?
Block has agreed to provide additional information to customers who obtain RALs and to pay a total
of $62.5 million, plus costs of notice estimated at $4 million, to settle this case. The total
Block will pay is called the “common fund.”
You are a member of the State Law Class. State Law class members are entitled to over $22.5 million
of the $62.5 million, before deductions for the pro rata portion of administration costs,
attorney’s fees and expenses relating to the State Law class, and service fees paid to the class
representatives, Renea Griffith, Maryanne Hoekman and Justin Sevey. The Cummins class members will
divide $32.5 million; the Becker class will divide over $5.8 million; and the Mitchell/Green
(Maryland and Alabama) class will divide more than $1.6 million; all before the same deductions are
made for administration costs, attorney’s fees and expenses, and service fees applicable to each
class.
Members of the different classes who submit claims will receive different amounts because each of
these cases is at a different stage of proceedings, holds different risks and different chances of
success. Each class settlement was negotiated based upon these differences. The four classes are
represented independently.
7. How Much Will My Payments Be?
In order to receive any payment, you must return a claim form (see Question 8 and the attached
claim form). Every Class Member who returns a valid claim form will receive at least some
distribution from the common fund. Your share of the fund will depend on the number of valid claim
forms that State Law Class Members send in and how many RALs you had. If every class member
submitted a claim, your share of the common fund would be a minimum of $1.67 for each RAL you
obtained during the class period. However, only a percentage of class members will actually
submit claim forms. For example, if only one of every four class members return claim forms, your
share of the fund would be $6.68 for each RAL you obtained ($1.67 times four). Your share will be
reduced by whatever percentage of the common fund is taken up with administration costs, attorney’s
fees, expenses, and service payments. It is unlikely that such costs will exceed 30%, but they
could be higher or lower. Please remember that this is only an example; the amount you receive from
the settlement could be greater or smaller.
8. How Can I Get A Payment?
To qualify for payment, you must send in a complete and valid claim form. A claim form is attached
to this Notice. You may also get a claim form from the Settlement Administrator’s website
[[www.INSERTWEBADDRESS.com]]. Read the instructions carefully, fill out the form, include all the
information the form asks for, sign it, and mail it so that it is postmarked no later than June
30, 2006. You may also email the claim form to the Settlement
Administrator at
[claims@INSERTWEBADDRESS.com]. If you email the claim form, you must do so no later than midnight on June
30, 2006.
9. When Would I Get My Payment?
The Court will hold a hearing at time/date/month/2006 at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301, to decide whether to approve the settlement. If the
Court approves the settlement after that, there may be appeals. It’s always uncertain whether these
appeals can be resolved, and resolving them can take time, perhaps more than a year. The settlement
administrator will keep the settlement website at [www.INSERTWEBADDRESS.com] updated so that
everyone who is in the class may keep informed of the progress of the settlement. Please be
patient. Note: It is unlikely that you will receive your payment until six months or more after the
date you send in a claim form.
10. Am I Giving Up Anything To Get A Payment Or Stay In The Class?
Unless you exclude yourself, also called “opting out” (see Question 12), you will be considered a
member of the class, which means that you can’t sue, continue to sue, or be part of any other
lawsuit against Block about the legal issues in this case. Giving up your claims is called a
“release.” Unless you exclude yourself from the settlement, you will release your claims whether or
not you submit a claim form and receive payment.
However, certain claims are not released even if you stay in the class. All claims made in other
currently existing class actions that relate to the RAL or other products and services offered by
Block are not released. Claims under state law based solely on allegations that a tax preparer
failed (A) to properly prepare a tax return or (B) to maintain the confidentiality of taxpayer
information resulting in injury based on “stolen identity” or similar misuse of taxpayer
information or theft of a RAL check; and claims to enforce the terms and conditions of the
Settlement Agreement, are similarly not released.
Class members who do not exclude themselves, but do not make a claim for money from this settlement
may choose to arbitrate their individual claims against Block for another year after the settlement
is finalized. Although Class Counsel recommend this settlement, they take no position on your
likelihood of succeeding on an individual basis in an arbitration case. You should obtain
independent legal help if you need more information about the economic value of the arbitration
alternative to excluding yourself or making a claim for money under the settlement.
The settlement requires Block to follow certain business practices with future RALs, and provides
Block with an incentive to register as a Credit Service Organization (“CSO”) in the jurisdictions
covered by the settlement. Block has two years to decide whether to register and come into
compliance with the various CSO statutes.
Important:
If you decide to go back to Block to obtain a RAL during the two-year period Block has
to register as a CSO in the various jurisdictions, and Block does register and comply with your
jurisdiction’s CSO statute in that two-year period, then you will not be able to sue Block for any
new RAL violation that you claim happened during the two-year period. But, if Block does not
register as a CSO and comply with the CSO statute in your jurisdiction, you will be able to sue
based on any new RAL violation that you claimed happened during that period. In addition, any
deadline on when you can sue Block (called the “statute of limitations”) will be suspended for the
two-year period.
11. Can I Exclude Myself From The Settlement (Sometimes Called “Opting Out”)?
Yes, you may “opt out” and exclude yourself from the Settlement Class. If you opt out, you will not
receive any payment from the common fund, you will not release any claims you may have against
Block, and you will not be bound by anything that happens in the Consolidated Action. If you opt
out, you will be free to pursue whatever legal rights you may have by pursuing your own lawsuit
against Block at your own risk and expense.
12. What Do I Do If I Want To Exclude Myself?
In order to opt out and exclude yourself from the Settlement Class, you must mail a “Request for
Exclusion” to the Settlement Administrator at address. Your Request for Exclusion must be in
writing and must be postmarked no later than May 1, 2006. To be effective, a Request for Exclusion
must contain: (a) the name of this case (Cummins, v. H & R Block, Inc.); (b) your name, address,
social security number and telephone number; (c) a statement that you want to opt out of the
lawsuit; and (d) your signature. If the Request for Exclusion is not postmarked by the deadline,
you will be included automatically in the Settlement Class and you may be eligible to receive
Settlement payments as summarized above. Even if you do not file a claim, you will be legally bound
by the proposed Settlement, including provisions releasing Block.
13. When And Where Will The Court Decide Whether To Approve The Settlement?
The Court will hold a Fairness Hearing on time/date/ at the Kanawha County Judicial Annex, 111
Court Street, Charleston, West Virginia 25301. At this hearing the Court will consider whether the
settlement is fair, reasonable, and adequate. If there are objections, the Court will consider
them. The Court will listen to people who have asked to speak at the hearing. The Court may also
decide how much to pay to Class Counsel. After the hearing, the Court will decide whether to
approve the settlement. We do not know how long these decisions will take. The hearing can be
continued at any time by the Court without any further notice to you.
14. Do I Have To Come To The Hearing?
No. You are not required to attend the hearing. But you are welcome to come at your own expense. If
you wish to speak, you may ask the Court for permission to speak at the Fairness Hearing. To do so,
you must send a letter saying that it is your “Notice of Intention to Appear in Cummins v. H&R
Block.” Be sure to include your name, address, telephone number, and your signature. Your Notice of
Intention to Appear must be received no later than May 1, 2006, and be sent to the Clerk of the
Court, Class Counsel, and Defense Counsel, at the addresses in Question 16. You cannot speak at the
hearing if you excluded yourself, because once you exclude yourself, the settlement does not affect
your rights.
15. What If I Do Nothing?
If you do nothing, you’ll get no money from this settlement. But, unless you exclude yourself, you
won’t be able to start a lawsuit, continue with a lawsuit, or be part of any other lawsuit against
Block about the legal issues in this case. You would, however, be able to arbitrate your claims
against Block for another year, as described in Question 10.
16. What If I Want To Object To The Settlement?
If you’re a Class Member who has not requested exclusion, you can object to the settlement if you
don’t like it. If you wish to object, you must write a letter stating your objections, the specific
reasons for each objection (including any legal support you want to bring to the Court’s attention)
and a description of any evidence you wish to introduce in support of your objections. You must
include your name, address, telephone number and your signature. Also include the name and number
of this action (Cummins v. H & R Block, Inc., Civil Action No. 03-C-134). Your letter must be
received in these four different places no later than May 1, 2006:
(i) Coordinating Counsel:
Brian A. Giasser, Esq.
Bailey & Glasser, LLP
227 Capitol Street
Charleston, WV 25301
227 Capitol Street
Charleston, WV 25301
(ii) Defendants’
Counsel:
Matthew M. Neumeier
|
Charles R. Bailey | |
Jenner & Block LLP
|
Bailey & Wyant PLLC | |
One IBM Plaza
|
P.O. Box 3710 | |
Chicago,IL 60611
|
Charleston, WV 25337-3710 |
(iii) The Court:
Clerk of Court
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
Kanawha County Circuit Court
111 Court Street
Charleston, WV 25301
17. What Is The Difference Between Excluding Myself And Objecting?
Excluding yourself is telling the Court that you don’t want to be part of the Class. If you
exclude yourself, you have no basis to object because the case no longer affects you. Objecting
is telling the Court that you don’t like something about the settlement and you don’t want the
Court to approve it. You can object only if you stay in the Class.
18. Who Are The Lawyers For The State Law Class?
The Court has appointed the following law firms to represent you and other State Law Class
Members. These lawyers are called Class Counsel. If you want to be represented by your own
lawyer, you may hire one at your own expense.
Daniel Hume, Esq.
|
Ronald L. Futterman, Esq. | |
Kirby Mclnerney & Squire. LLP
|
Michael I. Behn, Esq. | |
830 Third Avenue, 10th Floor
|
William W. Thomas, Esq. | |
New York, NY 10022
|
Futterman & Howard, Chtd. | |
| 122 S. Michigan Ave. Suite 1850 | ||
Michael B. Hyman, Esq.
|
Chicago, IL 60603 | |
William H. London, Esq. |
||
Much
Shelist Freed Denenberg Ament & Rubenstein, P.C. |
||
191 North Wacker, Suite 1800 |
||
Chicago, IL 60606 |
19. How Will Class Counsel’s Fees And Expenses Be Paid?
Class Counsel will make an application to the Court for approval of an award of attorneys’ fees and
expenses in an amount not more than 25% of the portion of the common fund attributable to the State
Law Class. The fees would pay Class Counsel for investigating the facts, litigating the case, and
negotiating the settlement. The Court will determine the amount of any fees and expenses awarded to
Class Counsel.
20. Does The Class Representative Get Additional Compensation?
Subject to Court approval, the named plaintiffs in the five cases which make up the Consolidated
Action will seek “service awards” for their active participation in this litigation. Any such
“service award” will be paid from the portions of the common fund attributable to the cases those
plaintiffs brought. Renea Griffith, Maryanne Hoekman and Justin Sevey will seek a “service award”
of $5,000. The Court will determine whether they receive “service awards” and the amount of their
award.
21. What If The Court Does Not Approve The Settlement?
If the Court does not approve the proposed Settlement as being fair, adequate and reasonable,
the Settlement Agreement will be null and void, and all parties will be returned to their
respective pre-Settlement status in the various lawsuits that the proposed Settlement hopes to
resolve.
22. Where Do I Get Additional Information?
This notice summarizes the proposed settlement. You can find answers to common questions about the
settlement, plus other helpful information at the Settlement Administrator’s website
[www.INSERTWEBADDRESS.com]. You can also get a copy of the Settlement Agreement from the website,
or by writing to the Settlement Administrator at ####. If you cannot get the information you need
from this notice or from the Settlement Administrator, you may contact State Law Class Counsel.
Please Do Not Contact The Court Or Block For Information.
BY ORDER OF THE COURT
The Honorable Louis Bloom
Circuit Judge
Kanawha County, West Virginia
Circuit Judge
Kanawha County, West Virginia
Dated: ,
2005
I
H & R Block Refund Anticipation Loan Settlement Claim Form
If the Settlement is approved by the Court you may be entitled to receive cash if you fill
out this form and mail it to:
Settlement Administrator
“H&R Block RAL Settlement”
PO Box 99999
Chicago, IL 88888
“H&R Block RAL Settlement”
PO Box 99999
Chicago, IL 88888
This
Claim Form must be postmarked by June 30, 2006. ONLY ONE CLAIM FORM IS ALLOWED PER
SETTLEMENT CLASS MEMBER, NO MATTER HOW MANY REFUND ANTICIPATION LOANS (“RALs”) YOU OBTAINED OR
WHERE YOU OBTAINED THEM. YOU CAN RECEIVE PAYMENT FOR EACH RAL YOU OBTAINED BY RETURNING ONE FORM.
MARRIED SETTLEMENT CLASS MEMBERS WHO FILED JOINT TAX RETURNS SHOULD RETURN ONLY ONE FORM BETWEEN
THEM.
Name: Joe Smith
Current Mailing Address: 123 Main St, Chicago, IL 88888
Current Mailing Address: 123 Main St, Chicago, IL 88888
Directions:
If the pre-printed information above is NOT CORRECT, please correct the information:
Current
Name for Settlement Check:
Current
Mailing Address:
Please also provide the following information (please print in ink or type):
Your
Social Security Number:
Your
Previous Social Security Number(s) (if applicable):
If you obtained any of your RALs under a different name, please state that name:
If you obtained your RAL(s) jointly with another person or persons, please provide the name
of each such person (Joint Borrower):
Please Provide the Social security Number(s) of any Joint Borrowers (if applicable)
Your phone number (optional): ( ) -
I affirm that this form contain any correct mailing address and social security number.
Claimant’s Signature Date:
MAILING INSTRUCTIONS
If you wish to receive payment from the settlement fund, you want mail this completed
form no later than June 30, 2006 to:
Settlement Administrator
[address]
[city, state]
[address]
[city, state]
This form must be postmarked no later than June 30, 2006.
A
Appendix A
PROPOSED H&R BLOCK COMMITMENTS
PERTAINING TO REFUND ANTICIPATION LOANS
PERTAINING TO REFUND ANTICIPATION LOANS
A. H&R Block Associate Training
Objective: Ensure that all Tax Professionals, Tax Professional Assistants, Client Service
Coordinators, Office Support Coordinators, Office Managers, Office Supervisors, Client Care
Specialists, Phone Specialists, District Managers, Assistant District Managers, Administrative
Assistants who support any of these positions, and any similar or successor positions (“client
contact associates”) who work in H&R Block tax offices or administrative locations such as call
centers that provide support to H&R Block tax offices are trained to deliver refund anticipation
loans to their clients in a manner that accurately and non-coercively presents all of the
client’s tax filing options and all of the client’s disposition options for the client’s refund
or balance due (“settlement options”) and enables the client to make an informed choice from
among the available alternatives. This objective will be implemented through a commitment to the
following business standards and practices:
| 1) | H&R Block will produce training curriculum, updated at least annually, that provides tax office associates and other client contact associates who work in H&R Block tax offices or administrative locations with in-depth knowledge of all tax filing and settlement options. This training, which will be mandatory for all H&R Block tax professionals and other client contact associates, will counsel associates not to pre-judge clients’ interest or propensity to choose any particular option, and will emphasize that clients should be fully informed of all options in order to make the most personally appropriate choice. | ||
| 2) | The training module for the refund anticipation loan product will cover all product features in depth, including these elements at minimum: |
| i) | A RAL is a short-term loan based upon the client’s anticipated tax refund, and it must be repaid whether or not the IRS actually delivers the refund for the expected dollar amount. | ||
| ii) | A RAL is provided by a third party lender, (institution name). H&R Block is not the creditor, or a credit service provider, or a loan broker in this transaction. | ||
| iii) | Part of the fee charged by the lender (to be described based on then-current pricing structure) will be owed whether or not the RAL is approved. | ||
| iv) | The annual percentage rate (APR) for a RAL is higher when compared to many other forms of credit. | ||
| v) | H&R Block may purchase a financial interest in the RALs it originates. | ||
| vi) | If the client owes debt for prior years’ refund anticipation loans to any RAL provider, or owes H&R Block tax preparation or other fees, those debts may be deducted from the amount of the client’s RAL or, in the event a RAL is denied, from the client’s refund amount. | ||
| vii) | Pursuant to the Refund Anticipation Loan Application signed by the tax client, disputes that arise from the client’s RAL decision (other than an individual claim the client brings in small claims court) will be settled by arbitration if elected by either party and no class actions can be brought in the arbitration forum. | ||
| viii) | H&R Block may use client information to market other products in accordance with IRS regulations. |
1
Appendix A
| Proposed H&R Block Commitments | 2 |
| 3) | The training module for refund anticipation loans will cover product delivery requirements in depth, including these elements at minimum: |
| i) | Tools used to inform clients about refund anticipation loans and other options at client intake and during tax interview, | ||
| ii) | Procedures for proper completion and retention of refund anticipation loan paperwork including the application, loan agreement, and Truth-In-Lending- Act disclosure? | ||
| iii) | Necessity of verifying and documenting client identification, as required by the USA Patriot Act. | ||
| iv) | RAL check distribution process, including methods for confirming identity when clients pick up checks. |
| 4) | Every tax office associate and other client contact associate who works in an H&R Block tax office or administrative location will be required to sign a statement affirming that he/she has received training on refund anticipation loan products, and agreeing to represent, explain and/or deliver the products as defined in sections (2) and (3) above. |
B. Product Delivery
Objective: Ensure that the presentation and delivery of refund anticipation loans to
clients in H&R Block tax offices is straightforward and non-coercive, and provides clients with
the information they need to make an informed choice from among the available alternatives.
This objective will be implemented through a commitment to the following business standards and
practices:
| 1) | Every H&R Block client will be provided with a written description of all available filing and settlement options. The lowest-cost alternatives (e-filing or mailing the return, receiving a refund by direct deposit or IRS check, or paying the balance due from personal funds) will be presented first. The higher-cost alternatives, including refund anticipation checks and refund anticipation loans, will be presented last, and will be clearly described as third party bank offerings available for an additional fee. | ||
| 2) | Every H&R Block client, during the tax preparation process when the amount of the client’s refund or balance due is known, will be presented with a side-by-side comparison of all applicable filing and settlement options in a screen shot in substantially the same form as Exhibit 1 hereto. For refund clients, this comparison will show the fees and timeline for refund delivery associated with each option, and the options will be arrayed from lowest client cost to greatest client cost. | ||
| 3) | Every H&R Block client who elects a refund anticipation loan will be provided with additional disclosures before this product election is finalized and the return is e-filed. These disclosures will be available for review in Spanish as well as English upon request, and will inform the client: |
| i) | A RAL is a short-term loan based upon the client’s anticipated tax refund, and it must be repaid whether or not the IRS actually delivers the refund for the expected dollar amount. | ||
| ii) | A RAL is provided by a third party lender, (institution name). H&R Block is not the creditor, or a credit service provider, or a loan broker in this transaction. |
Appendix A
| Proposed H&R Block Commitments | 3 |
| iii) | Part of the fee charged by the lender (to be described based on then-current pricing structure) will be owed whether or not the RAL is approved. | ||
| iv) | A RAL may be canceled within 48 hours of application. However, the IRS will nevertheless direct the client’s refund to the lending bank per instructions it received when the return was e-filed. This lender may charge the client a partial fee to cover the costs of handling the client’s refund, which will typically be delivered in 8-15 days. | ||
| v) | The annual percentage rate (APR) for a RAL is higher when compared to many other forms of credit. | ||
| vi) | H&R Block may purchase a financial interest in the RALs it originates. | ||
| vii) | If the client owes debt for prior years’ refund anticipation loans to any RAL provider, or owes H&R Block tax preparation or other fees, those debts may be deducted from the amount of the client’s RAL or, in the event a RAL is denied, from the client’s refund amount. | ||
| viii) | Pursuant to the Refund Anticipation Loan Application signed by the tax client, disputes that arise from the client’s RAL decision (other than an individual claim the client brings in small claims court) will be settled by arbitration if elected by either party and no class actions can be brought in the arbitration forum. | ||
| ix) | H&R Block may use client information to market other products in accordance with IRS regulations. |
| 4) | A product reference card will be produced annually that summarizes the refund anticipation loan product attributes and disclosures. This will be made available at every tax workstation to help tax associates discuss refund anticipation loans with their clients. | ||
| 5) | H&R Block tax office associates will inform clients who elect refund anticipation loans that there are lower-cost ways to obtain a refund that do not involve the bank fees associated with RALs. This information, delivered to the client in a written and/or electronic format as part of a personalized advice report, will suggest that opening a bank account would allow the un-banked client to take advantage of the IRS direct deposit option that typically yields the client’s refund in 8-15 days. Messaging to clients who are known to have bank accounts will also emphasize the IRS direct deposit option. |
C.
Advertising & Marketing
Objective: Ensure that all H&R Block advertising and marketing materials are clear,
accurate and consistent in their presentation of refund anticipation loan products. This
objective will be implemented through a commitment to the following business standards and
practices:
| 1) | Any reference to a refund anticipation loan product in H&R Block advertising and marketing materials will describe the product as a “refund anticipation loan” rather than any contraction or alternate construction such as “loan”, “refund loan”, “tax loan”, “your money”, “your tax refund”, “rapid refund” or “refund advance”. | ||
| 2) | Any reference to H&R Block’s “Instant Money” product will use “Instant Money refund anticipation loan” rather than any contraction or alternate construction such as “Instant |
Appendix A
| Proposed H&R Block Commitments | 4 |
Money
loan”, “Instant Money refund loan”, “Instant Money tax loan”, or ‘Instant
Money refund advance”.
| 3) | Advertising and marketing materials using the acronym “RAL” will define that acronym in its first occurrence by use of the phrase “refund anticipation loan (RAL)”. | ||
| 4) | H&R Block advertising and marketing materials will refer to the proceeds of a refund anticipation loan as a “loan check”, “refund anticipation loan check”, “RAL check” or similar wording. H&R Block advertising and marketing materials will not use references like “refund”, “rapid refund”, “refund check”, “refund amount”, “your money”, “your tax refund” or “your money fast” when describing the proceeds of a refund anticipation loan. | ||
| 5) | H&R Block advertising and marketing for standard refund anticipation loans Will include clear and conspicuous disclosure, as that phrase is contemporaneously defined by the Federal Trade Commission, that informs the audience: |
| i) | A refund account fee and an additional fee, disclosed as a finance charge, are charged by (institution name), the lender, | ||
| ii) | RAL amount or refund amount (in the event a RAL is denied) may be reduced by debts, if any, owed for prior year refund anticipation loans or other fees owed to H&R Block, such as tax preparation fees, | ||
| iii) | Clients who e-file their returns and specify direct deposit to their own bank accounts will typically receive their refunds in 8-15 days. |
| 6) | H&R Block advertising and marketing for same-day (“Instant Money”) refund anticipation loans will include clear and conspicuous disclosure, as that phrase is contemporaneously defined by the Federal Trade Commission, that informs the audience: |
| (l) | A refund account fee and an additional fee, disclosed as a finance charge, are charged by (institution name), the lender. | ||
| ii) | Availability is based on credit qualification. Clients not qualifying for a full same-day RAL may receive a partial same-day RAL and/or a RAL available as soon as one day later. | ||
| iii) | RAL amount or refund amount (in the event a RAL is denied) may be reduced by debts, if any, owed for prior year refund anticipation loans or other fees owed to H&R Block, such as tax preparation fees. | ||
| iv) | Clients who e-file their returns and specify direct deposit to their own bank accounts will typically receive their refunds in 8-15 days. |
D. Compliance & Performance Assessment
Objective: Ensure that H&R Block standards pertaining to the marketing and delivery
of refund anticipation loans are met. This objective will be implemented through a
commitment to the following business standards and practices:
| 1) | The Compliance and Legal departments will have authority to approve, modify, or veto any element of H&R Block refund anticipation loan training, product delivery systems and processes, and marketing & advertising that does not conform to the standards specified in Sections A, B and C of this document. |
Appendix
A
| Proposed H&R Block Commitments | 5 |
| 2) | H&R Block will designate one or more members of its Tax Compliance unit to oversee all training, delivery systems, and marketing & advertising pertaining to refund anticipation loans. | ||
| 3) | H&R Block will utilize “mystery shopping” at a representative sample of tax offices each tax season to assess compliance with company standards for in office refund anticipation loan product delivery. | ||
| 4) | H&R Block will require each District Manager to review compliance with refund anticipation loan disclosure, documentation, and product delivery standards throughout each tax season by use of a checklist to be completed during office visits. Results of these visits would be forwarded to the Compliance Department for review. |
B
APPLICATION FOR A REFUND ANTICIPATION LOAN AND TO OPEN A DEPOSIT ACCOUNT
Applicant’s Name
|
Applicant’s Social Security/Taxpayer Identification # | |||||
Joint Applicant’s Name
|
Joint Applicant’s Social Security/Taxpayer Identification # | |||||
I am applying for a Refund Anticipation Loan (“RAL”) from HSBC Bank USA, National Association
(“HSBC”) in the maximum amount for which HSBC will approve me. In this application (“Application”),
“H&R Block” means each of H&R Block, Inc. and each of its affiliates and subsidiaries (and
franchisees thereof); “Transmitter” means my electronic tax return transmitter, which may be the
same H&R Block; and “IRS” means the Internal Revenue Service.
1. IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. TO HELP THE GOVERNMENT
FIGHT THE FUNDING OF TERRORISM AND MONEY LAUNDERING ACTIVITIES, FEDERAL LAW REQUIRES ALL FINANCIAL
INSTITUTIONS TO OBTAIN, VERIFY, AND RECORD INFORMATION THAT IDENTIFIES EACH PERSON WHO OPENS AN
ACCOUNT. WHAT THIS MEANS FOR ME: WHEN I OPEN AN ACCOUNT, YOU WILL ASK FOR MY NAME, ADDRESS, DATE OF
BIRTH, AND OTHER INFORMATION THAT WILL ALLOW YOU TO IDENTIFY ME. I MAY ALSO BE ASKED TO PRODUCE MY
DRIVER’S LICENSE OR OTHER IDENTIFYING DOCUMENTS.
2. Collections. In consideration of the ease and convenience of the following
method of paying any delinquent debt I owe or the other applicant owes to HSBC Taxpayer
Financial Services inc. (“HSBC TFS”), H&R Block or Transmitter for prior years, or
Bank One, River City Bank, First Security Bank, Republic Bank, Santa Barbara Bank & Trust
or First Bank of Delaware (the “Other RAL Lenders”), and provided that such debt has not
been discharged in bankruptcy, I authorize and direct the repayment of such debt,
calculated as of the date of my Application, by means of (a) having such debt deducted from
the proceeds of my RAL, or (b) having my request for new loan proceeds denied or the amount
for which I have applied reduced and having such debt repaid to those entities by offset or
otherwise from my tax refund directly transmitted into my Refund Account with HSBC. If I
owe delinquent debt to more than one of the entities listed above, I authorize and direct
HSBC to pay such debts in the following order: HSBC TFS, Other RAL Lenders, and ERO. I also
authorize and instruct HSBC, HSBC TFS, and the Other RAL Lenders to disclose to each other
information about their respective credit experiences concerning my present and prior RALs,
Refund Anticipation Checks (“RACs”) or similar financial services, and my prior tax
returns.
PLEASE NOTE: If I have delinquent debt, I understand that HSBC or its servicer may be acting as a
debt collector to collect a debt and that any Information obtained will be used for that purpose.
3. Applicable Law. This Application and all the other documents executed in
connection with this Application or my RAL (collectively, “Documents”) shall be governed by
and construed, interpreted, and enforced in accordance with federal law and, to the extent
state law applies, the law of the State of Delaware (without reference to conflict of laws
principles).
4. Important Information About RALs. I understand that (a) I can file my federal income lax
return electronically without obtaining a RAL; (b) the IRS will send me a refund check or
electronically deposit my refund to my existing bank account; (c) the IRS normally makes an
electronic deposit in an average of about 12 days after an electronic filing; (d) HSBC tries to
make proceeds of an Instant RAL available on the day of application and a Classic RAL available on
the first business day after application; (e) HSBC cannot guarantee when any proceeds of a RAL or
an IRS refund will be available to me; and (f) a RAL may cost substantially more than other sources
of credit, and 1 may want to consider using other sources of credit.
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5. Deposit Authorization. (a) After I sign my Application, H&R Block and/or my Transmitter
will electronically transmit my tax return to the IRS and my Application to HSBC. I understand
that I will sign or authorize an IRS Transmittal Form 8453 or IRS e-file signature authorization
(“Deposit Authorization”) as part of my Application and electronic tax filing, and that the Deposit
Authorization and this Application provide an irrevocable agreement to have my tax refund disbursed
to HSBC, and irrevocably transfers to HSBC all of my rights, title, and interest in the proceeds of
my tax refund for purposes of the RAL I have requested and other purposes authorized by this
Application. (b) If my Application is denied or cancelled, and HSBC receives my tax refund, HSBC
will forward to me promptly any proceeds of my refund after deducting amounts permitted by this
Agreement. (c) If for any reason, any part of the anticipated tax refund is disallowed or offset by
the IRS, or if I should receive a refund check in the mail, I will advise HSBC immediately and
promptly pay HSBC any amounts owing with respect to my Application or a RAL, and pay H&R Block
and/or my Transmitter any fees owed to them involving my tax return.
6.
Refund Account. (a) I request that a deposit account (“Refund Account”) be
opened at HSBC upon receipt of my tax refund for the purposes of ensuring the repayment of
my RAL and other amounts described in the Documents. The Annual Percentage Yield and
interest rate on the Refund Account will be 0%. This means I will not receive any interest
on funds in the Refund Account. I understand that I cannot make withdrawals from the Refund
Account and that the funds in the Refund Account will be disbursed only as expressly
provided in the Documents. (b) HSBC may deduct any amounts I owe HSBC, H&R Block, my
Transmitter or their affiliates from my tax refund, any funds received in the Refund
Account, and any proceeds of a RAL. My engagement with H&R Block for services in connection
with my 2004 income tax return will end, and I am required to pay all fees to H&R Block for
services rendered by H&R Block, when I pick up my check for a RAL (or when HSBC
electronically transfers my proceeds to me or to another entity at my direction). If a
check or an electronic transfer of proceeds is not made available to me because I do not
receive a tax refund, then I am required to pay all fees to H&R Block for services rendered
by H&R Block on demand. HSBC also may withdraw amounts deposited into the Refund Account
from my tax refund to pay any check I receive for a RAL that I endorse and present for
payment or to disburse money to me in accordance with my Application. (c) I will not
receive a periodic statement for the Refund Account, but I will receive notice if funds in
the Refund Account are not sufficient to repay my RAL or are used for any purpose other
than repayment of my RAL or disbursement to me. HSBC may, immediately after disbursement of
all funds in the Refund Account, close the account without further notice to or
authorization from me.
7. Refund Account Fee. I will pay HSBC a fee of $24.95 for the administration of
the Refund Account and any disbursements to me from that account (“Refund Account Fee”). I
irrevocably commit to pay the Refund Account Fee after the Deposit Authorization is filed
with the IRS regardless of whether (a) I apply for a RAL or (b) my Application is approved
or denied. The Refund Account Fee is not imposed directly or indirectly as an incident to
or condition of any extension of credit. I can avoid the Refund Account Fee if I direct
that my tax refund not be deposited to HSBC before filing my Deposit Authorization with the
IRS.
8. No Fiduciary/Agency Duty. I understand that for various fees received, H&R Block is
acting only as my tax preparer (if applicable), my electronic filer and the deliverer of checks for
RALs with respect to this RAL transaction. I understand that an affiliate of my ERO has the right to
purchase an interest in my RAL issued by HSBC. I further understand that H&R Block is not acting in
a fiduciary, confidential, or agency capacity with respect to me in connection with this
transaction and has no other duties to me beyond the preparation of my tax return (if applicable),
the transmission of my tax return information to HSBC, the electronic filing of my tax return with
the IRS, and the delivery of checks for RALs. I acknowledge that I have independently evaluated and
decided to apply for a RAL, and that I am not relying on any recommendation from H&R Block . I also
understand that HSBC is not acting in a fiduciary, confidential, or agency capacity with respect to
me in connection with this transaction.
9. Disclosure Information. (a) “Information” means my 2004 federal and state income tax
returns, any information obtained in connection with my tax return (including information relating
to a possible offset of my tax refund or the possibility that my tax return is incorrect), and any
information relating to my Application or a RAL, RAC, or similar financial service I have received
or requested from HSBC. (b) “Authorized Parties” means HSBC, HSBC TFS, H&R Block, my Transmitter,
and their respective affiliates and agents, and includes the Fraud
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Service Bureau operated for HSBC. (c) The Authorized Parties may share Information to process my
Application, to determine whether to provide a RAL, to provide RALs to me, to collect delinquent
RALs, RACs, or fees payable to H&R Block, to prevent fraud, and to otherwise administer or
promote the program for RALs and RACs. (d) The Authorized Parties may disclose Information to the
IRS, state tax agencies and other financial institutions that provide RALs, RACs, or other
financial services. (e) the Authorized Parties may call, or input my Information on any website of,
the IRS or state tax agencies, in connection with my Application to, among other things, determine
the status of my tax return. The IRS and state tax agencies may disclose information about me and
my tax returns to the Authorized Parties. (f) H&R
Block may not use or disclose Information for any
purpose, except as permitted under Treas. Reg. Sec.301.7216-2 or as provided in this Application.
(g) I consent to HSBC sharing information as provided in the Privacy Policy.
10.
Service Fees. (a) Reissued Check Fee: I agree to pay $10 each time that a check is
reissued at my request for any reason. If I request that such a check be sent by overnight mail, I
agree to pay the charges for sending it by overnight mail. (b) Document Fee: If I ask HSBC to
provide me with a copy of my Application, loan agreement, billing statement or other document HSBC
may charge me $10 per document.
11. Arbitration Provision. Any claim, dispute or controversy between me and HSBC (as specifically
defined below for purposes of this Arbitration Provision), whether in contract or tort (intentional
or otherwise), whether pre-existing, present or future, and including constitutional, statutory,
common law, regulatory, and equitable claims in any way relating to (a) any of these or any other
Documents or any RAL or RAC that I have previously requested or received from HSBC, (b)
advertisements, promotions, or oral or written statements related to this or any other Application
for a RAL or any RAL or RAC that I have previously requested or received from HSBC, (c) the
relationship of HSBC and me relating to any of these or any other Documents or any RAL or RAC mat I
have
previously requested or received from HSBC; and (d) except as provided below, the validity,
enforceability or scope of this Arbitration Provision or any part thereof, including but not
limited to, the issue whether any particular claim, dispute or controversy must be submitted to
arbitration (collectively the “Claim”), shall be resolved, upon the election of either me or HSBC,
by binding arbitration pursuant to this Arbitration Provision and the applicable rules of the
American Arbitration Association (“AAA”) or the National Arbitration Forum (“NAF”) in effect at the
time the Claim is filed. I shall have the right to select one of these arbitration administrators
(the “Administrator”). The arbitrator must be a lawyer with more than ten (10) years of experience
or a retired or former judge. In the event of a conflict between this Arbitration Provision and the
rules of the Administrator, this Arbitration Provision shall govern. In the event of a conflict
between this Arbitration Provision and the balance of this Application or any other Documents, this
Arbitration Provision shall govern. Notwithstanding any language in this Arbitration Provision to
the contrary, no arbitration may Be administered, without the consent of all parties to the
arbitration, by any organization that has in place a formal or informal policy that is inconsistent
with and purports to override the terms of this Arbitration Provision, including the Class Action
Wavier Provision defined below.
HSBC
hereby agrees not to invoke its right to arbitrate an individual
Claim I may bring in small
claims court or an equivalent court, if any, so long as the Claim is pending only in that court. No
class actions or private attorney general actions in court or in arbitration or joinder or
consolidation of claims in court or in arbitration with other persons, are permitted without the
consent of HSBC and me. The validity and effect of the preceding sentence (herein referred to as
the “Class Action Waiver Provision”) shall be determined exclusively by a court and not by the
Administrator or any arbitrator. Neither the Administrator nor any arbitrator shall have the power
or authority to waive, modify or fail to enforce the Class Action Waiver Provision, and any attempt
to do so, whether by rule, policy, arbitration decision or otherwise, shall be invalid and
unenforceable.
Any arbitration hearing that I attend will take place in a location that is reasonably convenient
for me. On any Claim I file, I will pay the first $50.00 of the filing fee. At my request, HSBC
will pay the remainder of the filing fee and any administrative or hearing fees charged by the
Administrator, up to $1,500.00 on any Claim asserted by me in the arbitration. If I should be
required to pay any additional fees to the Administrator, HSBC will consider a request by me to pay
all or part of the additional fees; however, HSBC shall not be obligated to pay any additional fees
unless the arbitrator grants me an award. If the arbitrator grants an award in my favor, HSBC will
reimburse me for any additional fees paid or owed by me to the Administrator up to the amount of
the fees that would have been charged if the original Claim had been for the amount of the actual
award in my favor. If the arbitrator issues an award in HSBC’s favor, I will not be required to
reimburse HSBC for any fees HSBC has previously paid to the Administrator or for which HSBC is
responsible.
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This Arbitration Provision is made pursuant to a transaction involving interstate commerce, and
shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (the “FAA”). The
arbitrator shall apply substantive law consistent with the FAA, and not by any state law concerning
arbitration. The arbitrator shall follow and apply applicable substantive law to the extent
consistent with the FAA, statutes of limitation and claims of privilege and shall be authorized to
award all remedies permitted by applicable substantive law, including, without limitation,
compensatory, statutory and punitive damages, declaratory, injunctive and other equitable relief
and attorneys’ fees and costs. The arbitrator will follow rules of procedure and evidence
consistent with the FAA, this Arbitration Provision and, to the extent consistent with this
Arbitration Provision, the Administrator’s rules. Upon request of either party, the arbitrator
shall prepare a short reasoned written opinion supporting the arbitration award. Judgment upon the
award may be entered in any court having jurisdiction. The arbitrator’s award will be final and
binding except for. (a) any appeal right under the FAA; and (b) any appeal of Claims involving more
than $100,000. For such Claims, any party may appeal the award to a three-arbitrator panel
appointed by the Administrator, which will reconsider de novo (i.e., in its entirety) any aspect or
all aspects of the initial award that is appealed. The panel’s decision will be final and binding,
except for any appeal right under the FAA. Unless applicable law provides otherwise, the appealing
party will pay the appeal’s costs (i.e., the amounts owed to the Administrator and the
arbitrators), regardless of its outcome. However, HSBC will consider in good faith any reasonable
request for HSBC to bear up to the full costs of the appeal. Nothing in this Arbitration Provision
shall be construed to prevent HSBC’s use of offset or other contractual rights involving payment of
my income tax refund or other amount on deposit with HSBC to pay off any RAL, RAC, or similar
financial service, or H&R Block or other fees, now or thereafter owed by me to HSBC or any Other
RAL Lender or H&R Block or third party pursuant to the Documents or similar prior documents.
I ACKNOWLEDGE THAT I HAVE A RIGHT TO LITIGATE CLAIMS IN COURT BEFORE A JUDGE OR JURY, BUT I PREFER
TO RESOLVE ANY SUCH CLAIMS THROUGH ARBITRATION AND HEREBY KNOWINGLY AND VOLUNTARILY WAIVE MY RIGHTS
TO LITIGATE SUCH CLAIMS IN COURT BEFORE A JUDGE OR JURY, UPON ELECTION OF ARBITRATION BY HSBC OR BY
ME. I ACKNOWLEDGE THAT I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER OF
ANY CLASS OF CLAIMANTS OR AS A PRIVATE ATTORNEY GENERAL PERTAINING TO ANY CLAIM SUBJECT TO
ARBITRATION. I UNDERSTAND THAT, IF I AM A MEMBER OF THE PUTATIVE CLASS IN CUMMINS, ET AL. V. H&R
BLOCK, INC, ET AL., CASE NO. 03-C-134 IN THE CIRCUIT COURT OF KANAWHA COURT, WV, THIS ARBITRATION
CLAUSE MAY NOT ACT AS A WAIVER OF THE RIGHTS AND CLAIMS I MAY HAVE IN THAT ACTION.
This Arbitration Provision shall supersede all prior Arbitration Provisions contained in any
previous RAL or RAC application or related agreement and shall survive repayment of any RAL or RAC
and termination of my account; provided, however, that if I reject this Arbitration Provision as
set below, any prior Arbitration Provisions shall remain in full force and effect. If any portion of
this
Arbitration Provision is deemed invalid or unenforceable, it will not invalidate the remaining
portions of this Arbitration Provision. However, if a determination is made that the Class Action
Waiver Provision is unenforceable, this Arbitration Provision (other than this sentence) and any
prior Arbitration Provision shall be null and void.
To reject this Arbitration Provision, I must send HSBC, c/o HSBC Taxpayer Financial Services Inc.,
Account Research, P.O. Box 18097, Jacksonville, FL 32229, a signed writing (“Rejection Notice”)
that is received within thirty (30) days after the date I sign this Application. The Rejection
Notice must identify the transaction involved arid must include my name, address, and social
security number and must be signed by all persons signing this Application as Applicant(s). I may
send the Rejection Notice in any manner I see fit as long as it is received at the specified
address within the specified time. No other methods can be used to reject the Arbitration Agreement.
If the Rejection Notice is sent on my behalf by a third party, such third party must include
evidence of his or her authority to submit the Rejection Notice on my behalf.
As used in this Arbitration Provision, the term “HSBC” shall mean HSBC Bank USA, National
Association, HSBC TFS, Household Bank, f.s.b., Beneficial National Bank, and H&R Block, Inc., and
each of their parents, wholly or majority-owned subsidiaries, affiliates, or predecessors,
successors, assigns and the franchisees of any of them, and each of their officers, directors,
agents, and employees.
-4-
Contacting
the Administrator: If I have a question about the arbitration Administrator
mentioned in this Arbitration Provision or if I would like to obtain a copy of its arbitration
rules, I can contact the Administrator as follows: American Arbitration Association, 335 Madison
Avenue, New York, NY 10017, www.adr.org; National Arbitration Forum, P.O. Box 50191, Minneapolis,
MN 55405, www.arb-forum.com.
12. Survival. The provisions of this Application shall survive the execution of the Loan
Agreement and Disclosure Statement and the disbursement of funds.
13. Miscellaneous. (a) References to “I” or “me” or “my” in the Documents shall refer
individually to each applicant for a RAL and to both applicants, and the obligations of such
individuals under the Documents will be joint and several. The filing of an injured spouse form
shall not relieve either applicant of any such obligations under the Documents. (b) If any
provision of the Documents or part thereof is deemed invalid, such invalidity will not affect any
other provision of the Documents or part thereof. (c) HSBC may obtain a consumer report on me, and
other information from third parties, in connection with evaluating my Application, or collecting
or reviewing my RAL or accounts. (d) HSBC may assign all or a portion of any rights or obligations
relating to a RAL to a third party, including HSBC TFS, H&R
BlockO, an affiliate of H&R Block, a
franchiser of H&R Block, or an affiliate of HSBC, without notice
to me or my consent.
(e) Supervisory personnel of HSBC or its agents may listen to and record my telephone calls. (f) I
agree that you may send any notices and billing statements to the address of the primary applicant
and not to the address of the joint applicant if such address is
different. (g) I agree HSBC may
transfer, sell, participate or assign all or a portion of my RAL, and its rights, duties and
obligations relating to my RAL, to third parties, including HSBC TFS, its affiliates, successors
and assigns without notice to me or my consent.
14. State Notices. California residents: Married persons may apply for a separate account.
Iowa Residents: NOTICE TO CONSUMER: 1. Do not sign this paper before you read it. 2. You are
entitled to a copy of this paper. 3. You may prepay the unpaid balance at any time without penalty
and may be entitled to receive a refund of unearned charges in accordance with the law. New York
residents: Consumer reports may be requested in connection with this account or any updates,
renewals, or extensions thereof. Upon my request, HSBC will inform me of the names and addresses of
any consumer reporting agencies which have provided HSBC with such reports. Ohio residents: The
Ohio law against discrimination requires that all creditors make credit equally available to all
creditworthy customers, and that credit reporting agencies maintain separate credit histories on
each individual upon request. The Ohio Civil Rights commission administers compliance with these
laws. Pennsylvania residents: If this loan becomes in default, HSBC or its assignee intends to
collect default charges. Utah residents: Any prepaid finance charge not exceeding 5% of the
original amount of the loan shall be fully earned on the date the loan is extended, and shall be
nonrefundable in the event the loan is repaid prior to the date it is due. Any additional prepaid
finance charge is earned proportionally over the term of the loan, and, in the event of such
prepayment, the unearned portion of such charge, calculated on a pro rata basis according to the
remaining term of the loan, shall be refunded. Wisconsin residents: No provision of a marital
property agreement, a unilateral statement under Wisconsin Stats. s. 766.59 or a court decree under
Wisconsin Stats. s. 766.70 adversely affects the interest of the creditor unless the creditor, prior
to the time the credit is granted, is furnished a copy of the agreement, statement or decree or has
actual knowledge of the adverse provision when the obligation to the creditor is incurred. All
obligations described herein are being incurred in the interest of my marriage or family. A married
Wisconsin resident applicant must mail the name and address of his or her spouse, as well as the
applicant’s name and social security number, to HSBC c/o HSBC Taxpayer Services, 200 Somerset
Corporate Blvd., Bridgewater, NJ 08807, within two days.
15. Certification. I certify that the following information is true with respect to
the RAL I am requesting; (1) I do not owe any tax due and/or any tax lines from prior tax
years, nor have I previously filed a 2004 federal income tax return. (2) I do not have any
delinquent child support, alimony payments, student loans, V.A, loans or other federally
sponsored loans. (3) Presently, I do not have a petition (whether voluntary or involuntary)
filed nor do I anticipate filing a petition under federal bankruptcy laws. (4) I have not
had a RAL with any lender from a prior year that has been discharged in
bankruptcy. (5) I have not paid any estimated tax and/or did not have any amount of my 2003
refund applied to my 2004 tax return. (6) I am not presently making regular payments to the
IRS for prior year unpaid taxes. (7) I do not have a Power of Attorney presently in effect
or on file with the Internal Revenue Service (“IRS”) to direct my federal income tax refund
to any third party. (8) I am not filing a 2004 federal income tax return using a substitute
W-2, Form 4852, or any other form of substitute wage and tax documentation, unless the
-5-
source of
the Form 4852 is a Military Leave and Earnings Statement. (9) I am not filing a Form 8862
(Earned Income Credit Eligibility) with my 2004 federal income tax return. (10) I am not currently
incarcerated in a state or federal prison nor do I have 2004 income earned while an inmate at a
penal institution and claiming the Earned Income Credit.
(11) The 2004 income I have reported is
not solely from Schedule C or C-EZ(Profit or Loss from Business). (12) If Schedule C is present and
EIC claimed, and return is self-prepared or other prepared, I am a statutory employee and the W-2
indicates statutory employee in Box 15. (13) I am not filing Form 8379 (Injured Spouse Claim &
Allocation) with my 2004 federal income tax return. (14) I am not filing Form 1310 (Statement of
Person Claiming Refund Due Deceased Taxpayer) with the 2004 federal income tax return or filing a
federal income tax return Form 1040 on behalf of deceased taxpayer. (15) I do not have an amount
paid with request for an extension to file on Line 68, Field 1190 of Form 1040. (16) Everything
that 1 have stated in this Application is correct.
-6-
HSBC TAXPAYER FINANCIAL SERVICES DIVISION OF HSBC BANK USA, NATIONAL
ASSOCIATION
Privacy Statement
ASSOCIATION
Privacy Statement
Applicability
This Privacy Statement only applies to customers’ accounts with the HSBC Taxpayer Financial
Services division of HSBC Bank USA, National Association (“HSBC”). All other HSBC accounts are
governed by the HSBC Bank USA National Association Personal Banking Policy.
Introduction-Our Commitment to You
HSBC is proud to be part of a financial services organization that has been providing superior
products and services to its customers for many years. We greatly appreciate the trust that you and
millions of customers have placed in us, and we will protect that trust by continuing to respect
the privacy of all our applicants and customers even if our formal customer relationship ends.
How We Handle Information we Obtain
It is important for you to know that in order to ensure that our customers get the very best
service and the highest quality products, HSBC collects demographic information (like your name and
address) and credit information (like information related to your accounts with us and others).
This information comes either directly from you, for instance, from your application and
transactions on your account; or, it may come from an outside source such as your credit bureau
report. In addition. if you visit our Internet web site, we may collect certain information about
your Internet usage.
Because some of the information we gather is not publicly available, we take great care to ensure
that this information is kept safe from unauthorized access, and we would never share the
information in violation of any regulation or law. Because we respect your privacy and we value
your trust, the only employees or companies who can access your private personal information are
those who use it to service your account or provide services to you or to us. HSBC diligently
maintains physical, electronic and procedural safeguards that comply with applicable federal
standards to guard your private personal information and to assist us in preventing unauthorized
access to that information.
How We Share Information with Companies Affiliated with Us
From time to time, for general business purposes such as fraud control, or when we think it may
benefit you, we do share certain information with our affiliated companies, except as prohibited by
applicable law. These affiliated companies all provide financial services, such as banking,
consumer finance, insurance, mortgage, and brokerage services. Some examples include companies
doing business under the names Household, Beneficial, or HSBC. We may also share certain
information with non-financial service providers that become affiliated with us in the future (such
as travel, auto, or shopping clubs), except as prohibited by applicable law. The information we
share might come from your application, for instance your name, address, telephone number, social
security number, and e-mail address. Also, the information we share could include your transactions
with us or our affiliated companies (such as your account balance, payment history, and parties to
the transaction), your Internet usage, or your credit card usage. Except for Vermont residents, the
information we share could also include your assets, income, or credit reports.
How We Share Information under a Joint Marketing Agreement
We may also provide information non-affiliated financial companies (such as a tax preparer,
mortgage banker or insurance service provider) with whom we have a joint marketing agreement. The
sharing of information with these types of companies is permitted by law. The information we may
share also conies from the sources described above and might include your name, address, phone
number, and account experience with us.
How We Share Information with Other Third Parties
Except for California or Vermont residents, we also may share information with non-affiliated
companies that are able to extend special offers we feel might be of value to you. These companies
may be financial services providers (such as mortgage bankers or insurance agents) or they may be
non-financial companies (such as retailers, tax preparers, or marketing companies). These offers
are typically for products and services that you might not otherwise hear about. The information we
may provide them comes from the sources described above and might
-7-
include your name, address and phone number. You may tell us not to share information with
non-affiliated companies in this way by completing the form below. For California and Vermont
residents, applicable law requires us to obtain your permission in order to share information about
you in this way, and we have chosen not to share your information in this way.
We may also provide information to non-affiliated companies that perform operational, collection,
or fraud control services related to your account. The sharing of information with these types of
companies is permitted by law. Such a company might include a financial company (such as an
insurance service provider) or a non-financial company (such as a data processor or internet
service provider) with whom we have an agreement. The information we may share also comes from the
sources described above and might include your name, address, phone number, and account experience
with us.
Finally, we provide information about you to non-affiliated companies such as credit reporting
agencies and companies which provide services related to your account. This information sharing is
also permitted by law.
We reserve the right to change our privacy practices at any time in accordance with applicable law.
Notice of such changes will be provided if required by applicable law.
How to Opt-Out (non-affiliated companies) (Applicable to residents of all states except California
and Vermont)
If you do not want us to share your private information with non-affiliated companies (unless we
are permitted or required by law to do so), please let us know by simply calling 1-800-365-2641. If
you have previously informed us of your preference, you do not need to do so again. We will be
happy to comply with your “opt-out” request, which will only apply to the HSBC account you have
designated on the form by account number. An opt-out request by any party on a joint account will
apply to all parties on the joint account. Opt-out requests will not apply to information sharing
that is permitted by law. Please allow sufficient time for us to
process your request.
How to Opt-Out (affiliated companies) (Applicable to residents of all states except Vermont)
If you do not want us to share your credit information (such as your credit bureau information)
with companies that are affiliated with us, please let us know by simply calling 1-800-365-2641.
If you have previously informed us of your preference, you do not need to do so again. This request
will not apply to information about your transactions or experience with HSBC (such as account
information, account usage, or payment history), except as required by law, and will only apply to
the HSBC account you have designated on the form by account number. An opt-out request by any party
on a joint account will apply to all parties on the joint account.
Atenciòn
clientes his panoparlantes: Esta Declaraciòn Sobre la Privacidad proporciona informaciòn
sobre còmo manejamos informaciòn personal no publica acerca de nuestors clientes, las
circunstancias bajo las cuales podemos compartir tal informaciòn con otras personas, y còmo usted
puede pedir que no compartamos esa informaciòn con terceros que no sean afiliados
nuestros. Si quisiera que le proporcionemos una traducciòn al espafiol de la Declaraciòn Sobre la
Privacidad en su totalidad, sirvase comunicarse con nosotros llamàndonos gratis al
1-800-365-2641.
1-800-365-2641.
-8-
-9-
[The following line and language will be inserted at the end of the HRB RAL Application.]
By signing
below, I am indicating that I fully understand that I am applying for a loan and that I
have read, understand and agree to the terms set forth in this Application above and on the
following pages, including but not limited to: (a) Section 2 in which I agree that HSBC may use
amounts received from my tax refund to pay certain delinquent debts; and (b) Section I in which I
agree, upon my or HSBC’s election, to arbitrate any Claims that I may have. I also acknowledge that
I have 30 days from today’s date to reject the Arbitration Provision by following the procedure
described in Section 11. If I receive a RAL, I promise to pay the amount set forth in the “Total of
Payments” section on my Loan Agreement and Disclosure Statement or subsequent replacement TILA
Disclosure Statement, if any, on demand or when the anticipated refund from the IRS is
electronically deposited into my refund account, whichever comes first, and I agree to repay the
RAL whether or not my tax refund is paid in whole or in part to HSBC.
HSBC Taxpayer Financial Services Toll-Free Customer Service Number 1-800-524-0628 or visit us on
the web at hsbctfshrb.com for
more information.
LOAN AGREEMENT AND DISCLOSURE STATEMENT
In this Loan Agreement and Disclosure Statement (“Agreement”), “RAL” means a Refund Anticipation
Loan, “HSBC” means HSBC Bank USA, National Association, “I”, “me” and “my” means each person who
has applied to HSBC for a RAL. “H&R Block” means each of H&R Block, Inc., and each of its
affiliates and subsidiaries (and franchisees thereof).
The following Truth in Lending Act (“TILA”) disclosures are based on a RAL in the amount specified
in item 10 of the Itemization of Amount Financed. I will receive a replacement TILA Disclosure
Statement if I am approved for a RAL in a different amount. In addition, I may receive a duplicate
copy of this TILA Disclosure Statement if I am approved for a RAL in the amount on which this
disclosure is based, and the RAL is disbursed to me by check.
Truth in Lending Act Disclosure Statement
1. Amount Financed (the amount of credit provided to me or
on my behalf) |
$ | _______ | (e) | |
2. FINANCE CHARGE (the dollar amount the credit will cost me) |
$ | _______ | (e) | |
3. Total of Payments (the amount I will have paid after I
have made all payments as scheduled) |
$ | _______ | (e) | |
4. ANNUAL PERCENTAGE RATE (the cost of my credit as a yearly
rate) |
_______ | %(e) |
| “e” = estimate | If line is left blank, amount is “0” |
Creditor: My creditor is HSBC Bank USA, National Association.
Demand Feature: My loan will be repayable on demand or when the anticipated tax refund is
electronically deposited in my Refund Account, whichever is earlier.
Payment Schedule: HSBC estimates that the Total of Payments set forth above will be due in
a single payment approximately 12 days from the date of this Agreement.
Security Interest: I am providing HSBC with a security interest in my tax refund payment by
the IRS, and, except for Virginia residents, in all funds deposited in the Refund Account and that
Refund Account.
Late Charge: A late charge equal to 1.5% of the unpaid Total of Payments may be imposed on
the date 35 days after payment of my loan is demanded, and on the same date of each succeeding
month (or if there is no such date, the last date of the month).
Prepayment: If I pay off early, I will not be entitled to a refund of part or all of the
Finance Charge.
Contract Reference: Refer to the Application and the accompanying Loan Agreement for
additional information about nonpayment, default, any right to accelerate the maturity of the
obligation, and any prepayment rebates or penalties.
Required Deposit: The Annual Percentage Rate does not take into account my required
deposit.
Itemization of Amount Financed |
||||
1. Amount paid directly to me |
$ | _____ | (e) | |
2. Amount paid for my Refund Account Fee to HSBC |
$ | _____ | ||
3. Amount paid for Tax Prep to H&R Block |
$ | _____ | ||
4. Amount
paid for prior year items owed to H&R Block |
$ | _____ | ||
5. Amount paid for System Administration Fee to H&R Block |
$ | _____ | ||
6. Amount paid for Peace of Mind to H&R Block |
$ | _____ | ||
7. Amount paid for E Filing to H&R Block |
$ | _____ | ||
8. Amount Financed (Items l+2+3+4+5+6+7) |
$ | _____ | (e) | |
9. Prepaid FINANCE CHARGE (RAL Fee to HSBC) |
$ | _____ | (e) | |
10. Total RAL (Items 8+9) |
$ | _____ | (e) | |
| “(e)” = estimate | If line is left blank, amount is “0” |
Loan Agreement
1. Obligation on RAL.
(a) I am obligated, on the date I sign this Agreement, to accept a RAL if
HSBC approves my Application, unless HSBC approves me for a smaller RAL than the
amount set forth in the Total of Payments section in the TILA Disclosure Statement
above. If I am approved for a smaller RAL, I will be provided with a replacement
TILA Disclosure Statement and I will be obligated to accept the smaller RAL if I
accept the RAL proceeds check. My loan will begin, and HSBC will earn the finance
charge, when I am approved for the RAL and the proceeds check or stored value card
is made available or a transfer is initiated to my bank account.
(b) I may cancel my RAL transaction, or my obligation to accept a RAL, for up to 48 hours after I
become obligated to accept the RAL. To do so, I must return to HSBC or the office where I received
my RAL proceeds check any check I have received (or cash in the amount of the RAL proceeds check if
I have cashed the check or received a transfer to my bank account), and comply with other
requirements set by HSBC. I understand that, if I use my right to cancel, my finance charge will be
refunded to me, HSBC will provide me with any tax refund only after HSBC receives the refund from
the IRS, and I must still pay a Refund Account Fee.
2.
Security Interest. If I receive a RAL, I grant HSBC a security interest in the property
described in the TILA Disclosure Statement as collateral for my obligations to repay the RAL and
perform my other obligations under the Application and this Agreement.
3. Deductions. My Prepaid Finance Charge, Refund Account Fee, fees for the completion and
system administration of my income tax return by H&R Block, and prior year debt owed to H&R Block
shall be deducted from the proceeds of my RAL.
4.
Other Charges. (a) I agree to pay a returned check charge
of $19 if any check
or similar instrument I give HSBC is not honored. (b) I agree to pay a late charge as
described in the TILA Disclosure Statement if I do not repay my loan when due. (c) In the
event that I pay my account by telephone, I agree to pay up to a $10 fee for each such
2
payment. HSBC reserves the right to change such fee from time to time. I may call Customer Service
for a current fee schedule. (d) I also agree to pay any attorney’s fees and collection agency costs
incurred by HSBC or its affiliates to collect any delinquent RAL as permitted by law,
5. Instant RAL. If I receive an Instant RAL, and if the electronic filing of my
return is rejected by the Internal Revenue Service (“IRS”),
I authorize H&R Block to insert
my Refund Account number at HSBC, together with HSBC’s routing transit number, on my signed
paper returns, and mail them to the IRS.
6.
Application of Payments. Each payment I make on the RAL will be applied in any
order determined by HSBC.
BY SIGNING BELOW, I AGREE TO THE TERMS OF THIS LOAN AGREEMENT, AND TO THE APPLICATION, WHICH
INCLUDES AN ARBITRATION CLAUSE WHICH MAY SUBSTANTIALLY LIMIT MY
RIGHTS IN THE EVENT OF A DISPUTE. I ALSO ACKNOWLEDGE RECEIVING A COMPLETED COPY OF THIS LOAN AGREEMENT AND DISCLOSURE STATEMENT.
CAUTION:
IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT BEFORE YOU
SIGN IT.
NOTICE TO CUSTOMER
NOTICE TO CUSTOMER
| (a) | DO NOT SIGN THIS IF IT CONTAINS ANY BLANK SPACES. | |
| (b) | YOU ARE ENTITLED TO AN EXACT COPY OF ANY AGREEMENT YOU SIGN. | |
| (c) | YOU HAVE THE RIGHT AT ANY TIME TO PAY IN ADVANCE THE UNPAID BALANCE DUE UNDER THIS AGREEMENT AND YOU MAY BE ENTITLED TO A PARTIAL REFUND OF THE FINANCE CHARGE. |
Date: |
(Seal) | (Seal) | ||||||
| Signature of Applicant | Signature of Joint Applicant | |||||||
3
INFORMATION,
IDENTIFICATION AND INSTRUCTIONS IN CONNECTION WITH APPLICATION FOR
A REFUND ANTICIPATION LOAN AND TO OPEN A DEPOSIT ACCOUNT
A REFUND ANTICIPATION LOAN AND TO OPEN A DEPOSIT ACCOUNT
System Protected by US. Patent Nos. 4,890,228,5,193,057, and 5,963,921
1. INFORMATION
Applicant’s Name
( )
First M.I.
Last
Maiden
Home Address
Mailing Address
Social Security/Taxpayer Identification #___- ___- ___
Date of Birth /
/
Home Phone # (
)
- - (Required)
Work Phone #(
) - (Required, if employed)
Residence: o Own o Rent o Other
Checking Account: oYes o No
Savings Account: oYes o No
Joint Applicant-Spouse(if joint return)
( )
First M.I.
Last
Maiden
Home Address
Mailing Address
Social Security/Taxpayer Identification #___- ___- ___
Date of Birth /
/
Home Phone # (
) - (Required,if different)
Work Phone #(
) - (Required, if employed)
Residence: o Own o Rent o Other
Checking Account: oYes o No
Savings Account: oYes o No
| 2. | IDENTIFICATION | |
| The following unexpired identification (“ID”) has been provided: |
| For Applicant’s photo ID: | For Applicant’s second ID, if required: | |||||||
| Type of ID | Type of ID | |||||||
| ID Number, if any | Number, if any | |||||||
| Place of Issuance | Place of Issuance | |||||||
| Date of Issuance, if any | Date of Issuance, If any | |||||||
| Expiration Date, if any | Expiration Date, if any | |||||||
| Additional Information | Additional Information | |||||||
| For Joint Applicant’s photo ID: | For Joint Applicant’s second ID, if required: | |||||||
| Type of ID | Type of ID | |||||||
| ID Number, if any | ID Number, if any | |||||||
| Place of Issuance : | Place of Issuance | |||||||
| Date of Issuance, if any | Date of Issuance, if any | |||||||
| Expiration Date, if any | Expiration Date, if any | |||||||
| Additional Information | Additional Information | |||||||
| 3. | PAYMENT INSTRUCTIONS |
| A. | If I receive an Instant Refund Anticipation, Loan (“RAL”), I would like to receive the proceeds of my Instant RAL by check. | ||
| B. | If I receive a Classic RAL, I would like to receive the proceeds of my Classic RAL by check, unless the boxes below are completed, in which case I choose to receive my funds via direct deposit into may bank o savings account o checking account. My bank account number into which I authorize HSBC Bank USA, National |
| Association (“HSBC”) to direct my funds is | |||
| o o o o o o o o o o o o o o o o o. | |||
| The routing transit number (RTN) of the bank where my account resides, which is required for my loan funds to be accurately deposited into my bank account listed above, is o o o o o o o o o. | |||
| C. | If my refund is greater than the amount of my RAL, I would like to receive the proceeds of my excess refund by check, unless the boxes below are completed, in which case I choose to receive my proceeds by direct deposit into my o savings account o checking account o IRA account o HRBFA(H&R Block Financial Advisors) account. My account number into which I authorize HSBC to direct my funds is o o o o o o o o o o o o o o o o o. | ||
| The routing transit number (RTN) of the financial institution where my account resides, which is required for my funds to be accurately deposited into my account listed above, is o o o o o o o o o. | |||
| D. | Notwithstanding any request above to receive proceeds by direct deposit, if I am approved for a RAL in an amount smaller than the amount specified in item 10 of the Itemization of Amount Financed in the Loan Agreement and Disclosure Statement provided herewith, the RAL and any excess refund will be disbursed by check. |
By signing below I am indicating that I fully understand that I am applying for a loan and that I
confirm that the information set forth herein is true and correct.
Toll-Free Customer Service Number 1-800-524-0628
2
APPLICATION FOR A REFUND ANTICIPATION LOAN, REFUND ANTICIPATION CHECK, OR REFUND PROCESSING
TRANSFER AND TO OPEN A DEPOSIT ACCOUNT
TRANSFER AND TO OPEN A DEPOSIT ACCOUNT
System Protected by U.S. Patent Nos. 4,890,228,5,193,057, and 5,963,921
This Application is submitted to HSBC Bank USA, National Association (“HSBC”) for a Refund
Anticipation Check (“RAC”), Refund Processing Transfer (“RPT”), or Refund Anticipation Loan
(“RAL”), and a Refund Account In (his Application, “Bank Product” means a RAC, RPT, or RAL; “ERO”
means my electronic tax return originator; “Transmitter” means my electronic tax return
transmitter, which may be the same as my ERO; and “IRS” means the Internal Revenue Service.
Customer Commitment
Understanding Your Options and Responsibilities as a RAL Customer
the servicer of your loan, HSBC Taxpayer Financial Services Inc. works closely with your tax
preparer and the bank to provide refund anticipation loans (RALs). As part our commitment to the
highest standords in responsible lending, we would like to provide with the following explanation
of your options and responsibilities.
If you are owed a federal tax refund, you have a right to choose how you will receive money.
Please understand there are several options available to you at varying costs, [ILLEGIBLE] of which
are free. (2) A refund anticipation loan (RAL) is one of
these options, but it is not your federal
tax refund and it is not free. A RAL is a loan that you must pay even if the Internal
Revenue Service (IRS) does not issue your tax refund. (3) As a customer, you deserve to have the
Information you need to make an informed [ILLEGIBLE]
so please take time to read and understand the
terms and fees associated with a RAL. (4) You have a responsibility to ask questions regarding your
RAL and we have [ILLEGIBLE] responsibility to make certain you have clear answers. Please call our
toll-free customer hotline at 1-800-5240628. (5) You have a responsibility to communicate
outstanding debts or liens you owe to the government. Be honest with yourself and the bank about
your ability to repay the loan. (6) You are guaranteed the right to change our mind about obtaining
a RAL within 48 hours after signing the loan agreement. For further details on canceling your
obligation, please consult your loan agreement. (7) e are committed to providing you with additional
financial education tools and resources. We encourage you to access important budgeting, savings
and debt management formation toll-free through the National Foundation for Credit Counseling at
1-800-388-2227 (English), or 1-800- (82-9832 (espaftol), or by visiting ourCreditCounts.com
(English) or
SuCreditoCuenta.comTM (espaftol). (8) If you have further questions about
the RAL product, or feel that any of the above commitments [ILLEGIBLE]
responsibilities have not been met, please call our toll-free customer hotline at
1-800-524-0628.
As an example, the information below is provided to help make sure you know your options
| Timing of Check or | ||||||||||
| Filing Option/Delivery Option | Relative Cost* | Direct Deposit” | ||||||||
Paper Return Mailed
to IRS
|
Refund Check | $ | Cost of tax preparation | 8 to 8 weeks | ||||||
Paper Return Mailed
to IRS
|
Direct Deposit | $ | Cost of tax preparation | 5 weeks | ||||||
[ILLEGIBLE] - filed return
|
Direct Deposit | $$ | Cost of tax preparation & e-filing, if any | 8 to 14 days | ||||||
[ILLEGIBLE] -filed return
|
RAC or RPT | $$$ | Same as e-filed above plus cost of RAC/RPT | 8 to 14 days | ||||||
[ILLEGIBLE] - filed return
|
RAL | $ | $$$ | Same as e-Filed above plus cost of RAL | 1 to 2 days | |||||
Since costs may vary between facilitators, the relative costs are shown as $ for least expensive to
$$$$ for most expensive. Options available may vary by facilitator.
| * | While actual times may vary, these are approximate times and may help you in making your choice. (Times are based on www.irs.gov information and provider experience.) |
| 1. | INFORMATION |
Applicant’s Name
First M.I.
Last
Home Address
Mailing Address (if different from above)
Social Security/Taxpayer Identification #___- ___- ___
Date of Birth /
/
Joint Applicant - Spouse(if joint return)
( )
First M.I.
Last
Maiden
Home Address
Mailing Address (if different from above)
Social Security/Taxpayer Identification #___- ___- ___
Date of Birth /
/
-1-
| 2. | IDENTIFICATION My identification information will be entered and retained electronically. | |
| 3. | REQUEST FOR A RAL, FEDERAL RAC, or FEDERAL RPT (ONLY ONE BOX MAY BE MARKED IN THIS SECTION 3) | |
| o I apply for a Refund Anticipation Loan secured by my federal income tax refund (“RAL”) in the maximum amount for which HSBC will approve me. | ||
| o I apply for a Refund Anticipation Check based on my federal income tax refund (“Federal RAC”) in the maximum amount for which HSBC will approve me. | ||
| o I apply for a Refund Processing Transfer based on my federal income tax refund (“Federal RPT”) in the maximum amount for which HSBC will approve me. | ||
| 4. | REQUEST FOR A STATE RAC (MAY ONLY BE REQUESTED IF A REQUEST IS ALSO MADE IN SECTION 3) | |
| o I apply for a Refund Anticipation Check for each state from which I receive a state income tax refund (each a “State RAC”) in the maximum amount for which HSBC will approve me. | ||
| 5. | PAYMENT INSTRUCTIONS |
| A. | If I receive an Instant RAL or Federal RAC, I would like to receive the proceeds of my Instant RAL or Federal RAC by check, unless I notify my ERO that I choose to receive such proceeds through a stored value card, where available. | ||
| B. | If I receive a Federal RPT, State RAC, or Classic RAL, or if my refund is in excess of any product I obtain, I would like to receive the proceeds of my Federal RPT, State RAC, Classic RAL, or excess refund amount by check, unless I notify my ERO that I choose to receive such proceeds through a stored value card, where I available, or through direct deposit into the bank account with the account number and routing transit number I have provided in connection with the processing of this Application. | ||
| C. | Notwithstanding any request to receive proceeds by direct deposit or by stored value card, if I am approved for a RAL in an amount smaller than the amount specified in item 12 of the Itemization of Amount Financed in the Loan Agreement and Disclosure Statement provided herewith, the RAL and any excess refund will be disbursed by check. | ||
| D. | If I choose to receive proceeds by a stored value card, I agree to the terms set forth in the stored value card agreement provided to me, which is incorporated herein by reference. Certain fees shall apply. |
| 6. | IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. TO HELP THE GOVERNMENT FIGHT THE FUNDING OF TERRORISM AND MONEY LAUNDERING ACTIVITIES, FEDERAL LAW REQUIRES ALL FINANCIAL INSTITUTIONS TO OBTAIN, VERIFY, AND RECORD INFORMATION THAT IDENTIFIES EACH PERSON WHO OPENS AN ACCOUNT. WHAT THIS MEANS FOR ME: WHEN I OPEN AN ACCOUNT, YOU WILL ASK FOR MY NAME, ADDRESS, DATE OF BIRTH, AND OTHER INFORMATION THAT WILL ALLOW YOU TO IDENTIFY ME. YOU MAY ALSO ASK TO SEE MY DRIVER’S LICENSE OR OTHER IDENTIFYING DOCUMENTS. | |
| 7. | Applicable Law. This Application and all other documents executed in connection with this Application for my Bank Product (collectively, “Documents”), shall be governed by and construed, interpreted, and enforced in accordance with federal law and, to the extent state law applies, the law of the State of Delaware (without reference to conflict of laws principles). | |
| 8. | Important Information About Bank Products. I understand that: (a) I can file my federal income tax return electronically without obtaining a Bank Product; (b) the IRS will send me a refund check or electronically deposit my refund to my existing bank account; (c) the IRS normally makes an electronic deposit in an average of about 12 days after an electronic filing; (d) I will not receive the proceeds of a RAC or RPT until HSBC receives my tax refund from the IRS; (e) HSBC tries to make proceeds of an Instant RAL available on the day of application and a Classic RAL available on the first business day after application; (f) HSBC cannot guarantee when any proceeds of |
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| a Bank Product or an IRS or state tax refund will be available to me; and (g) a RAL may cost substantially more than other sources of credit, and I may want to consider using other sources of credit. | |||
| 9. | Deposit Authorization. (a) After I sign my Application, my ERO and/or my Transmitter will electronically transmit my tax return to the IRS and my Application to HSBC. I understand that I will sign or authorize an IRS Transmittal Form 8453, IRS e-file signature authorization, and/or appropriate state deposit authorization form (“Deposit Authorization”) as part of my Application and electronic tax filing, and that the Deposit Authorization and this Application provide an irrevocable agreement to have my tax refund disbursed to HSBC, and irrevocably transfers to HSBC all of my rights, title, and interest in the proceeds of my tax refund, for purposes of the Bank Product I have requested and other purposes authorized by this Application. (b) If my Deposit Authorization results in a state tax refund being received in my Refund Account, I agree that such refund may be disbursed to HSBC to pay any RAL I have obtained before being otherwise disbursed. (c) If My Application is denied or cancelled, and HSBC receives my tax refund, HSBC will forward to me promptly any proceeds of my refund after deducting amounts permitted by this Agreement. (d) If I apply for a RAL, and if for any reason, any part of the anticipated tax refund is disallowed or offset by the IRS, or if I should receive a refund check in the mail, I will advise HSBC immediately and promptly pay HSBC any amounts owing with respect to my Application or RAL, and pay my ERO any fees owed to them involving my tax return. If I apply for RAC or RPT, and in the event a RAC or RPT, is not issued, I still owe and agree to pay any fees owed to the ERO and refund account fees, and if a RAC or RPT is issued, you will look only to amounts received into the refund account, up to the amount of the RAC or RPT, as the consideration for the RAC or RPT. | ||
| 10. | Refund Account.(a) I request that a deposit account (“Refund Account”) be opened at HSBC upon receipt of my tax refund for the purposes of ensuring the repayment of my Bank Product and other amounts described in the Documents. The Annual Percentage Yield and interest rate on the Refund Account will be 0%. This means I will not receive any interest on funds in the Refund Account. I understand I cannot make withdrawals from the Refund Account and that the funds in the Refund Account will be disbursed only as expressly provided in the Documents. (b) HSBC may deduct any amounts I owe HSBC, my ERO, my Transmitter or their affiliates from my tax refund, any funds received in the Refund Account, and any proceeds of a Bank Product. My engagement with the ERO for services in connection with my 2004 income tax return will end, and I am required to pay all fees to the ERO for services rendered by the ERO, when my Bank Product check is made available to me (or when HSBC electronically transfers my proceeds to me or to another entity at my direction). If a check or an electronic transfer of proceeds is not made available to me because I do not receive a tax refund, then I am required to pay all fees to the ERO for services rendered by the ERO on demand. HSBC also may withdraw amounts deposited into the Refund Account from my tax refund to pay any check I receive for a Bank Product that I endorse and present for payment or to disburse money to me in accordance with my Application. (c) I will not receive a periodic statement for the Refund Account, but I will receive notice if funds in the Refund Account are not sufficient to repay my Bank Product or are used for any purpose other than repayment of my Bank Product or disbursement to me. HSBC may, immediately after disbursement of all funds in the Refund Account, close the account without further notice to or authorization from me. | ||
| 11. | Refund Account Fee. I will pay HSBC a fee of $27.95 if I apply for a Federal RAC or a RAL and receive my proceeds by check or through a stored value card, where available, or $14.95 if I apply for a Federal RPT or a RAL and receive my proceeds by direct deposit, for the administration of the Refund Account and any disbursements to me from that account (“Refund Account Fee”). I irrevocably commit to pay the Refund Account Fee after the Deposit Authorization is filed with the IRS and regardless of whether (a) I apply for a Bank Product or (b) my Application is approved or denied. The Refund Account Fee is not imposed directly or indirectly as an incident to or condition of any extension of credit. I can avoid the Refund Account Fee if I direct that my tax refund not be deposited to HSBC before filing my Deposit Authorization with the IRS. | ||
| 12. | Collections. In consideration of the ease and convenience of the following method of paying any delinquent debt I owe or the other applicant owes to HSBC, HSBC Taxpayer Financial Services Inc. (“HSBC TFS”), my ERO or Transmitter for prior years, or Bank One, River City Bank, First Security Bank, Republic Bank or Santa Barbara Bank & Trust (the “Other RAL Lenders”), and provided that such debt has not been discharged in bankruptcy, I authorize and direct the repayment of such debt, calculated as of the date of my Application, by means of (a) having such debt deducted from the proceeds of my Bank Product, or (b) having my Application denied or the amount for which I have applied reduced and having such debt repaid to those entities by offset or otherwise from my tax refund directly transmitted into my Refund Account at HSBC. If I owe delinquent debt to more than one of the entities listed above, I authorize and direct HSBC to pay such debts in the following order, HSBC, HSBC TFS, Other RAL Lenders, and ERO. I also authorize and Instruct HSBC and the Other RAL Lenders to disclose to each other information about their respective credit |
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| experiences concerning my present and prior Bank Products or similar financial services, and my prior tax returns. |
PLEASE NOTE: If I have delinquent debt, I understand that HSBC or HSBC TFS may be acting as a debt
collector hereunder to collect a debt and that any information obtained will be used for that
purpose.
| 13. | No Fiduciary/Agency Duty. I understand that for various fees received, my ERO is acting only as my tax preparer (if applicable), my electronic filer, the deliverer of checks for Bank Products, or as the purchaser of an interest in certain Bank Products issued by HSBC (if applicable) with respect to this Bank Product transaction. I further understand that my ERO is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction and has no other duties to me beyond the preparation of my tax return (if applicable), the transmission of my tax return information to HSBC, the electronic filing of my tax return with the IRS, and the delivery of checks for Bank Products. I acknowledge that I have independently evaluated and decided to apply for a Bank Product, and that I am not relying on any recommendation from my ERO. I also understand that HSBC I not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction. | |
| 14. | Disclosure of Information. (a) “Information” means my 2004 federal and state income tax returns, any information obtained in connection with my tax return (including information relating to a possible offset of my tax refund or the possibility that my tax return is incorrect), and any information relating to my Application or a Bank Product or similar financial service I have received or requested from HSBC. (b) “Authorized Parties” means HSBC, HSBC TFS, my ERO, my Transmitter, and their respective affiliates and agents, and includes the Fraud Service Bureau operated for HSBC. (c) The Authorized Parties may share Information to process my Application, to determine whether to provide a Bank Product, to provide Bank Products to me, to collect delinquent Bank Products or ERO fees, to prevent fraud, and to otherwise administer or promote the program for Bank Products. (d) The Authorized Persons may disclose Information to the IRS, state tax agencies and other financial institutions that provide Bank Products or other financial services. (e) The Authorized Parties may call, or input my information on any website of, the IRS or state tax agencies in connection with my Application to, among other things, determine the status of my tax return. The IRS and state tax agencies may disclose information about me and my tax returns to the Authorized Parties. (f) My ERO may not use or disclose Information for any purpose, except as permitted under Treas. Reg. Sec. 301.7216-2 or as provided in these Terms. (g) I consent to HSBC sharing information as provided in the Privacy Statement. | |
| 15. | Service Fees. (a) Reissued Check Fee: I agree to pay $10 each time that a check is reissued at my request for any reason. If I request that such a check be sent by overnight mail, I agree to pay the charges for sending it by overnight mail. (b) Document Fee: If I ask for a copy of my Application, loan agreement, billing statement or other document, I may be charged me $10 per document. | |
| 16. | Arbitration Provision. Any claim, dispute or controversy between me and HSBC (as specifically defined below for purposes of this Arbitration Provision), whether in contract or tort (intentional or otherwise), whether pre-existing, present or future, and including constitutional, statutory, common law, regulatory, and equitable claims in any way relating to (a) any of these or any other Documents or any RAC, RPT, or RAL that I have previously requested or received from HSBC, (b) advertisements, promotions, or oral or written statements related to this or any other Application for a RAL or RAC, RPT, or RAL that I have previously requested or received from HSBC, (c) the relationship of HSBC and me relating to any of these or any other Documents or any RAC, RPT, or RAL that I have previously requested or received from HSBC; and (d) except as provided below, the validity, enforceability or scope of this Arbitration Provision or any part thereof, including, but not limited to, the issue of whether any particular claim, dispute or controversy must be submitted to arbitration (collectively the “Claim”), shall be resolved, upon the election of either me or HSBC, by binding arbitration pursuant to this Arbitration Provision and the applicable rules of either the JAMS or the National Arbitration Forum (“NAF”) in effect at the time the Claim is filed. I shall have the right to select one of these arbitration administrators (the “Administrator”). The arbitrator must be a lawyer with more than ten (10) years of experience or a retired or former judge. In the event of a conflict between this Arbitration Provision and the rules of the Administrator, this Arbitration Provision shall govern. In the event of a conflict between this Arbitration Provision and the balance of this Application or any other Documents, this Arbitration Provision shall govern. | |
| HSBC hereby agrees not to invoke its right to arbitrate an individual Claim I may bring in small claims court or an equivalent court, if any, so long as the Claim is pending only in that court. No class actions or private attorney |
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| general actions in court or in arbitration or joinder or consolidation of claims in court or in arbitration with other persons, are permitted without the consent of the parties hereto. The validity and effect of the preceding sentence (hereinafter referred to as the “class action waiver provision”) shall be determined exclusively by a court and not by an arbitrator. Any arbitration hearing that I attend will take place in a location that is reasonably convenient for me. On any Claim I file, I will pay the first $50.00 of the filing fee. At my request, HSBC will pay the remainder of the filing fee and any administrative or hearing fees charged by the Administrator, up to $1,500,00 on any Claim asserted by me in the arbitration. If I should be required to pay any additional fees to the Administrator, HSBC will consider a request by me to pay all or part of the additional fees; however, HSBC shall not be obligated to pay any additional fees unless the arbitrator grants me an award. If the arbitrator grants an award in my favor, HSBC will reimburse me for any additional fees paid or owed by me to the Administrator up to the amount of the fees that would have been charged if the original Claim had been for the amount of the actual award in my favor. If the arbitrator issues an award in HSBC’s favor, I will not be required to reimburse HSBC for any fees HSBC has previously paid to the Administrator or for which HSBC is responsible. | ||
| This Arbitration Provision is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (the “FAA”), and not by any state law concerning arbitration. The arbitrator shall follow and apply applicable substantive law to the extent consistent with the FAA, statutes of limitation and claims of privilege and shall be authorized to award all remedies permitted by applicable substantive law, including, without limitation, compensatory, statutory and punitive damages, declaratory, injunctive and other equitable relief and attorneys’ fees and costs. The arbitrator will follow rules of procedure and evidence consistent with the FAA, this Arbitration Provision and the Administrator’s rules. Upon request of either party, the arbitrator shall prepare a short reasoned written opinion supporting the arbitration award. Judgment upon the award may be entered in any court having jurisdiction. The arbitrator’s award will be final and binding except for: (a) any appeal right under the FAA; and (b) Claims involving more than $100,000. For such Claims, any party may appeal the award to a three-arbitrator panel appointed by the Administrator, which will reconsider de novo (i.e., in its entirety) any aspect or all aspects of the initial award that is appealed. The panel’s decision will be final and binding, except for any appeal right under the FAA. Unless applicable law provides otherwise, the appealing party will pay the appeal’s costs (i.e., the amounts owed to the Administrator and the arbitrators), regardless of its outcome. However, HSBC will consider in good faith any reasonable request for HSBC to bear up to the full costs of the appeal. Nothing in this Arbitration Provision shall be construed to prevent HSBC’s use of offset or other contractual rights involving payment of my income tax refund or other amount on deposit with HSBC to pay off any Bank Product or similar financial service, or ERO or other fees, now or thereafter owed by me to HSBC or any Other RAL Lender or ERO or third party pursuant to the Documents or similar prior documents. | ||
| I ACKNOWLEDGE THAT I HAVE A RIGHT TO LITIGATE CLAIMS IN COURT BEFORE A JUDGE OR JURY, BUT I PREFER TO RESOLVE ANY SUCH CLAIMS THROUGH ARBITRATION AND HEREBY KNOWINGLY AND VOLUNTARILY WAIVE MY RIGHTS TO LITIGATE SUCH CLAIMS IN COURT BEFORE A JUDGE OR JURY, UPON ELECTION OF ARBITRATION BY HSBC OR BY ME. I ACKNOWLEDGE THAT I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER OF ANY CLASS OF CLAIMANTS OR AS A PRIVATE ATTORNEY GENERAL PERTAINING TO ANY CLAIM SUBJECT TO ARBITRATION. | ||
| This Arbitration Provision shall supersede any prior Arbitration Provision contained in any previous Bank Product application or related agreement and shall survive repayment of any Bank Product and termination of my account; provided, however, that if I reject this Arbitration Provision as set forth below, all prior Arbitration Provisions shall remain in full force and effect. If any portion of this Arbitration Provision is deemed invalid or unenforceable, it will not invalidate the remaining portions of this Arbitration Provision. | ||
| To reject this Arbitration Provision, I must send HSBC, c/o HSBC Taxpayer Financial Services Inc., Account Research, P.O. Box 18097, Jacksonville, FL 32229, a signed writing (“Rejection Notice”) that is received within thirty (30) days after the date I sign this Application. The Rejection Notice must identify the transaction involved and must include my name, address, and social security number and must be signed by all persons signing this Application as Applicant(s). I may send the Rejection Notice in any manner I see fit as long as it is received at the specified address within the specified time. No other methods can be used to reject the Arbitration Provision. If the Rejection Notice is sent on my behalf by a third party, such third party must include evidence of his or her authority to submit the Rejection Notice on my behalf. | ||
| As used in this Arbitration Provision, the term “HSBC” shall mean HSBC Bank USA, National Association, the Custodian, HSBC TFS, Household Bank, f.s.b., and Beneficial National Bank, and each of their parents, wholly or |
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| majority-owned subsidiaries, affiliates, predecessors, and successors, and each of their officers, directors, and employees. | ||
| Contacting Arbitration Administrators: If I have a question about the arbitration administrators mentioned in this Arbitration Provision or if I would like to obtain a copy of their arbitration rules, I can contact them as follows: JAMS, 45 Broadway, 28th Floor, New York, NY 10017, www.jamsadr.com; National Arbitration Forum, P.O. Box 50191, Minneapolis, MN 55405, www.arb-forum.com. | ||
| 17. | Advance RAL. If I have an outstanding Advance RAL, I instruct HSBC to pay off the Advance RAL by deducting the amount I owe from my tax refund. | |
| 18. | Survival. The provisions of the Application and Terms shall survive the execution of the Loan Agreement and Disclosure Statement and the disbursement of funds. | |
| 19. | Miscellaneous, (a) References to “I” or “me” or “my” in the Documents shall refer individually to each applicant for a Bank Product and to both applicants, and the obligations of such individuals under the Documents will be joint and several. (b) If any provision of the Documents or part thereof is deemed invalid, such invalidity will not affect any other provision of the Documents or part thereof. (c) HSBC may obtain a consumer report on me, and other information from third parties, in connection with evaluating my Application, or collecting or reviewing my Bank Product or accounts. (d) HSBC may assign all or a portion of any rights or obligations relating to a Bank Product to a third party, including HSBC TFS, my ERO, an affiliate of my ERO, a franchiser of my ERO, or an affiliate of HSBC, without notice to me or my consent. (e) Supervisory personnel of HSBC or its agents may listen to and record my telephone calls. | |
| 20. | State Notices. California residents: Married persons may apply for a separate account. Iowa Residents: NOTICE TO CONSUMER: 1. Do not sign this paper before you read it. 2. You are entitled to a copy of this paper. 3. You may prepay the unpaid balance at any time without penalty and may be entitled to receive a refund of unearned charges in accordance with the law. New York residents: Consumer reports may be requested in connection with this account or any updates, renewals, or extensions thereof. Upon my request, HSBC will inform me of the names and addresses of any consumer reporting agencies which have provided HSBC with such reports. Ohio residents: The Ohio law against discrimination requires that all creditors make credit equally available to all creditworthy customers, and that credit reporting agencies maintain separate credit histories on each individual upon request. The Ohio Civil Rights commission administers compliance with these laws. Pennsylvania residents: If this loan becomes in default, HSBC or its assignee intends to collect default charges. Utah residents: Any prepaid finance charge not exceeding 5% of the original amount of the loan shall be fully earned on the date the loan is extended, and shall be nonrefundable in the event the loan is repaid prior to the date it is due. Any additional prepaid finance charge is earned proportionally over the term of the loan, and, in the event of such prepayment, the unearned portion of such charge, calculated on a pro rata basis according to the remaining term of the loan, shall be refunded. Wisconsin residents: No provision of a marital property agreement, a unilateral statement under Wisconsin Stats. s. 766.59 or a court decree under Wisconsin Stats. s. 766.70 adversely affects the interest of the creditor unless the creditor, prior to the time the credit is granted, is furnished a copy of the agreement, statement or decree or has actual knowledge of the adverse provision when the obligation to the creditor is incurred. All obligations described herein are being incurred in the interest of my marriage or family. A married Wisconsin resident applicant must mail the name and address of his or her spouse, as well as the applicant’s name and social security number to HSBC c/o HSBC Taxpayer Financial Services, 200 Somerset Corporate Blvd., Bridgewater, NJ 08807, within two days. For state qualification purposes, HSBC may also be known under its dba, Imperial Thrift and Loan Association. | |
| 21. | Certification. | |
| If I am requesting a RAL, I certify that the following information is true with respect to the RAL I am requesting; (1) I do not owe any tax due and/or any tax liens from prior tax years, nor have I previously filed a 2004 federal income tax return. (2) I do not have any delinquent child support, alimony payments, student loans, V.A. loans or other federally sponsored loans. (3) Presently, I do not have a petition (whether voluntary or involuntary) filed nor do I anticipate filing a petition under federal bankruptcy laws. (4) I have not had a RAL with any lender, from a prior year that has been discharged in bankruptcy. (5) I have not paid any estimated tax and/or did not have any amount of my 2003 refund applied to my 2004 tax return. (6) I am not presently making regular payments to the IRS for prior year unpaid taxes. (7) I do not have a Power of Attorney presently in effect or on file with the Internal Revenue Service (“IRS”) to direct my federal income tax refund to any third party. (8) I am not filing a 2004 federal income tax return using a substitute W-2, From 4852, or any other form of substitute wage and tax documentation, |
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| unless the source of the Form 4852 is a Military Leave and Earnings Statement. (9) I am not filing a Form 8862 (Earned Income Credit Eligibility) with my 2004 federal income tax return. (10) I am not currently incarcerated in a state or federal prison nor do I have 2004 income earned while an inmate at a penal institution and claiming the Earned Income Credit. (11) The 2004 income I have reported is not solely from Schedule C or C-EZ (Profit or Loss from Business). (12) If Schedule C is present, EIC claimed, and return is self-prepared or other prepared, I am a statutory employee and the W-2 indicates statutory employee in Box 15. (13) I am not filing Form 8379 (Injured Spouse Claim & Allocation) with my 2004 federal income tax return. (14) I am not filing Form 1310 (Statement of Person Claiming Refund Due Deceased Taxpayer) with the 2004 federal income tax return or filing a federal income tax return Form 1040 on behalf of deceased taxpayer. (15) I do not have an amount paid with request for an extension to file on Line 68, Field 1190 of Form 1040. (16) Everything that I have stated in this Application it correct. | ||
| If I am requesting a RAC or RPT, I certify that the following is true: (1) Presently, I do not have a petition (whether voluntary or involuntary) filed nor do I anticipate filing a petition under federal bankruptcy laws. (2) I have not had a RAL with HSBC, or any other RAL lender, from a prior year that has been discharged in bankruptcy. (3) Everything that I have stated in this Application is correct. |
7
HSBC TAXPAYER FINANCIAL SERVICES DIVISION OF HSBC BANK USA, NATIONAL
ASSOCIATION
Privacy Statement
ASSOCIATION
Privacy Statement
Applicability
This
Privacy Statement only applies to customers’ accounts with the HSBC
Taxpayer Financial Services division of HSBC Bank USA, National Association
(“HSBC”). All other HSBC accounts are governed by the HSBC Bank, USA National
Association Personal Banking Policy.
Introduction — Our Commitment to You
HSBC is proud to be part of a financial services organization that has been
providing superior products and services to its customers for many years. We
greatly appreciate the trust that you and millions of customers have placed in
us, and we will protect that trust by continuing to respect the privacy of all
our applicants and customers even if our formal customer relationship ends.
How We Handle Information we Obtain
It is important for you to know that in order to ensure that our customers get
the very best service and the highest quality products, HSBC collects demographic information (like your name and
address) and credit information (like information related to your accounts with us and others). This information
comes either directly from you, for instance, from your application and, transactions on your account; or, it may
come from an outside source such as your credit bureau report. In addition, if you visit our Internet web site, we
may collect certain information about your Internet usage.
Because some of the information we gather is not publicly available, we take
great care to ensure that this information is kept safe from unauthorized
access, and we would never share the information in violation of any regulation
or law. Because we respect your privacy and we value your trust, the only
employees or companies who can access your private personal information are
those who use it to service your account or provide services to you or to us.
HSBC diligently maintains physical, electronic and procedural safeguards that
comply with applicable federal standards to guard your private personal
information and to assist us in preventing unauthorized access to that
information.
How We Share Information with Companies Affiliated with Us
From time to time, for general business purposes such as fraud control, or when
we think it may benefit you, we do share certain information with our
affiliated companies, except as prohibited by applicable law. These affiliated
companies all provide financial services, such as banking, consumer finance,
insurance, mortgage, and brokerage services. Some examples include companies
doing business under the names Household, Beneficial, or HSBC. We may also
share certain information with non-financial service providers that become
affiliated with us in the future (such as travel, auto, or shopping clubs),
except as prohibited by applicable law. The information we share might come
from your application, for instance your name, address, telephone number,
social security number, and e-mail address. Also, the information we share
could include your transactions with us or our affiliated companies (such as
your account balance, payment history, and parties to the transaction), your
Internet usage, or your credit card usage. Except for Vermont residents, the
information we share could also include your assets, income, or credit reports.
How We Share Information under a Joint Marketing Agreement
We may also provide information to non-affiliated financial companies (such as
a tax preparer, mortgage banker or insurance service provider) with whom we
have a joint marketing agreement. The sharing of information with these types of
companies is permitted by law. The information we may share also comes from the
sources described above and might include your name, address, phone number, and
account experience with us.
How We Share Information with Other Third Parties
Except for California or Vermont residents, we also may share information with
non-affiliated companies that are able to extend special offers we feel might
be of value to you. These companies may be financial services providers (such
as mortgage bankers or insurance agents) or they may be non-financial companies
(such as retailers, tax preparers, or marketing companies). These offers are
typically for products and services that you might not otherwise bear about.
The information we may provide them comes from the sources described above and
might include your name, address and phone number. You may tell us not to share
information with non-affiliated companies in this way by completing the form
below. For California and Vermont residents, applicable law requires
8
us to obtain your permission in order to share information about you in this
way, and we have chosen not to share your information in this way.
We may also provide information to non-affiliated companies that perform
operational, collection, or fraud control services related to your account.
The sharing of information with these types of companies is permitted by law.
Such a company might include a financial company (such as an insurance
service provider) or a non-financial company (such as a data processor or
internet service provider) with whom we have an agreement. The information we
may share also comes from the sources described above and might include your
name, address, phone number, and account experience with us.
Finally, we provide information about you to non-affiliated companies
such as credit reporting agencies and companies which provide services
related to your account. This information sharing is also permitted by
law.
We reserve the right to change our privacy practices at any time in
accordance with applicable law. Notice of such changes will be provided if
required by applicable law.
How to Opt-Out (non-affiliated companies) (Applicable to residents of all
states except California and Vermont)
If you do not want us to share your private information with non-affiliated
companies (unless we are permitted or required by law to do so), please let
us know by simply calling 1-800-365-2641. If you have previously informed us
of your preference, you do not need to do so again. We will be happy to
comply with your “opt-out” request, which will only apply to the HSBC account
you have designated on the form by account number. An opt-out request by any
party on a joint account will apply to all parties on the joint
account. Opt-out requests will not apply to information sharing that is permitted by
law. Please allow sufficient time for us to process your request.
How to Opt-Out (affiliated companies) (Applicable to residents of all states
except Vermont)
If you do not want us to share your credit information (such as your credit
bureau information) with companies that are affiliated with us, please let us
know by simply calling 1-800-365-2641. If you have previously informed us of
your preference, you do not need to do so again. This request will not apply
to information about your transactions or experience with HSBC (such as
account information, account usage, or payment history), except as required
by law, and will only apply to the HSBC account you have designated on the
form by account number. An opt-out request by any party on a joint account
will apply to all parties on the joint account.
Atencòin
clientes hispanoparlantes: Esta Declaraciòn Sobre la Privacidad
proporciona informaciòn sobre còmo manejamos informaciòn personal no publica
acerca de nuestors clientes, las circunstancias bajo las cuales podemos
compartir tal informaciòn con otras personas, y còmo usted puede pedir que no
compartamos esa informaciòn con terceros que no sean afiliados nuestros. Si
quisiers que le proporcionemos una traducciònal espafiol de la
Declaraciòn
Sobre la Privacidad en su totalidad, sirvase comunicarse con nosotros
Ilamàndonos gratis al 1-800-365-
9
[Insert this line and language at the end of the application.]
By signing
below I am indicating that I have read, understand and agree to the terms set forth in
this Application, including: (a) Section 12 in which I agree that HSBC may use amounts received
from my tax refund to pay delinquent debts I owe HSBC or others; and (b) Section 16 in which I
agreed, upon my or HSBC’s election, to arbitrate any Claims that I may have. I also acknowledge
that I have 30 days from today’s date to reject the Arbitration Provision by following the
procedure described in Section 16. If I receive a RAL, I promise
to pay the amount set forth in
the “Total of Payments” section on my Loan Agreement and Disclosure Statement or subsequent
replacement TILA Disclosure Statement, if any, on the earlier of (a) on demand, (b) when the
anticipated refund from the IRS is electronically deposited into my deposit account with HSBC, or
(c) 24 days after my loan is approved if I receive my proceeds on a stored value card and if ray
anticipated tax refund has not been received in full by that date,
and I agree to repay the RAL
whether or not my tax refund is paid in whole or in part to HSBC.
(Applicant
— Primary Taxpayer Signature)
|
(Joint Applicant — Spouse Signature, If Joint Return) |
I certify that I have received my cashier’s check(s)
|
from HSBC on | . | |||||
| (Check #) | (Date) |
(Client’s Signature)
I certify that I have received my cashier’s check(s)
|
from HSBC on | . | |||||
| (Check #) | (Date) |
(Client’s Signature)
HSBC Taxpayer Financial Services Toll-Free Customer Service Number 1-800-524-0628 or visit us on the web at hsbctfs.com for more information.
LOAN AGREEMENT AND DISCLOSURE STATEMENT
In this Loan Agreement and Disclosure Statement (“Agreement”), “RAL”
means a Refund Anticipation Loan, “HSBC” means HSBC Bank USA, National
Association, “I”, “me” and “my” means each person who has applied to HSBC
for a RAL. “ERO” means my electronic return originator. “HSBC TFS” means
HSBC Taxpayer Financial Services Inc.
Truth in Lending Act (“TILA”) Disclosure Statement
THE FOLLOWING DISCLOSURE BOX IS APPLICABLE ONLY IF MY TOTAL RAL IS IN THE
AMOUNT SPECIFIED IN ITEM 3 AND I RECEIVE NO FURTHER ADVANCE.
1. Amount Financed (the amount
of credit provided to me or on
my behalf) |
$ | (e) | ||
2. FINANCE CHARGE (the dollar
amount the credit will cost me) |
$ | (e) | ||
3. Total of Payments (the amount
I will have paid after I have
made all payments as scheduled) |
$ | (e) | ||
4. ANNUAL PERCENTAGE RATE (the
cost of my credit as a yearly
rate) |
%(e) |
“e”= estimate
|
If line is left blank, amount if “0” |
THE FOLLOWING DISCLOSURE BOX IS APPLICABLE IF MY TOTAL RAL EQUALS THE LESSER OF A) MY
FEDERAL TAX REFUND OR B) $7000. HOWEVER, IF IT IS SUBSEQUENTLY DETERMINED THAT I AM APPROVED
FOR A TOTAL RAL IN AN AMOUNT DIFFERENT THAN THE AMOUNT SPECIFIED IN
ITEM 3 BELOW, I WILL
RECEIVE A REPLACEMENT SET OF TRUTH IN LENDING DISCLOSURES.
1. Amount Financed (the amount of credit provided
to me or on my behalf) |
$ | (e) | ||
2. FINANCE CHARGE (the dollar amount the credit
will cost me) |
$ | (e) | ||
3. Total of Payments (the amount I will have paid
after I have made all payments as scheduled) |
$ | (e) | ||
4. ANNUAL PERCENTAGE RATE (the cost of my credit
as a yearly rate) |
%(e) |
“e”= estimate
|
If line is left blank, amount is “0” |
Creditor: My creditor is HSBC Bank USA, National Association.
Demand
Feature: My loan will be repayable on the earlier of (a) on demand, (b) when the
anticipated tax refund is electronically deposited in my Refund Account with HSBC,or (c) 24 days
after ray loan is approved if I receive my proceeds on a stored value card and if my anticipated
tax refund has not been received in full by that date.
Payment Schedule: HSBC estimates that the total loan amount will be due in a single payment
approximately 12 days from the date of this Agreement.
Security Interest: I am providing HSBC with a security interest in my tax refund
payment by the IRS and/or any state taxing authority, in all funds deposited in the Refund
Account, and, except for Virginia residents, in that Refund Account.
Late Charge: A late charge equal to 1.5% of the unpaid Total of Payments may be imposed on
the date 35 days after payment of my loan is demanded, and on
the same date of each succeeding
month (or if there is no such date, the last date of the month).
Prepayment:
If I pay off early, I will not be entitled to a refund of part or all of the
Finance Charge.
Contract Reference: Refer to the Application and the Loan Agreement for additional
information about nonpayment, default, any right to accelerate the maturity of the obligation, and
any prepayment rebates or penalties.
Required
Deposit: The Annual Percentage Rate does not take into account my required deposit.
2
THE FOLLOWING ITEMIZATION OF AMOUNT FINANCED IS APPLICABLE ONLY IF MY TOTAL RAL IS IN THE
AMOUNT SPECIFIED IN ITEM 14 AND I RECEIVE NO FURTHER ADVANCE.
Itemization of Amount Financed |
||||
1. Amount paid directly to me |
$ | (e) | ||
2. Amount
paid for my Refund Account Fee to HSBC |
$ | |||
3. Amount paid for Tax Prep to [ERO Name] |
$ | |||
4. Amount
paid for Debt owed to [ ERO Name ] |
$ | |||
5. Amount paid to [Transmitter Name] |
$ | |||
6. Amount
paid to [Service Bureau Name] |
$ | |||
7. Amount paid for Doc Prep to [ERO] |
$ | |||
8. Amount paid for E-filing to [ERO Name] |
$ | |||
9. Amount
paid for ________ to [Name] |
$ | |||
10. Amount
paid for ________ to HSBC |
$ | |||
11. Amount paid previously to me for an Instant RAL |
$ | |||
12. Amount Financed (Items l+2+3+4+5+6+7+8+9+10+11) |
$ | (e) | ||
13. Total Prepaid FINANCE CHARGE (RAL Fee to HSBC) |
$ | (e) | ||
14. Total RAL (Items 12+13) |
$ |
“(e)”=estimate
|
If line is left blank, amount is “0” |
3
THE FOLLOWING ITEMIZATION OF AMOUNT FINANCED IS APPLICABLE IF I RECEIVE A
SUBSEQUENT ADVANCE. HOWEVER, IF IT IS SUBSEQUENTLY DETERMINED THAT I AM
APPROVED FOR A RAL IN AN AMOUNT DIFFERENT THAN THE AMOUNT SPECIFIED IN ITEM 14
BELOW, I WILL RECEIVE A REPLACEMENT ITEMIZATION OF AMOUNT FINANCED WITH MY
CHECK.
Itemization of Amount Financed |
||||
1. Amount paid directly to me |
$ | (e) | ||
2. Amount
paid for my Refund Account Fee
to HSBC |
$ | |||
3. Amount paid for Tax Prep to [ERO Name] |
$ | |||
4. Amount paid for Debt owed to [ERO Name) |
$ | |||
5. Amount paid to [Transmitter Name] |
$ | |||
6. Amount paid to [Service Bureau Name] |
$ | |||
7. Amount paid for Doc Prep to [ERO] |
$ | |||
8. Amount paid for E-filing to [ERO Name] |
$ | |||
9. Amount paid for to [Name] |
$ | |||
10. Amount paid for______ to HSBC |
$ | |||
11. Amount paid previously to me for an
Instant RAL |
$ | |||
12. Amount Financed (Items
1+2+3+4+5+6+7+8+9+10+11) |
$ | (e) | ||
13. Total Prepaid FINANCE CHARGE
(RAL Fee to HSBC) |
$ | (e) | ||
14. Total RAL (Items 12+13) |
$ |
“(e)”=estimate
|
If line is left blank, amount is “0” |
Loan Agreement
1.
Obligation on RAL.
(a) I am obligated, on the date I sign this Agreement, to accept a RAL if HSBC approves my
Application, unless HSBC approves me for a smaller RAL than me amount set forth in the Total of
Payments section in the TILA Disclosure Statement above. If I am approved for a smaller RAL, I
will be provided with a replacement TILA Disclosure Statement and I will be obligated to accept
the smaller RAL if 1 accept the RAL proceeds check. My loan will begin, and HSBC will earn the
finance charge, when I am approved for the RAL and the proceeds check is made available or a
transfer is initiated to my bank account.
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(b) I may cancel my RAL transaction, or my obligation to accept a RAL, for up to 48
hours after I become obligated to accept the RAL. To do so, I must return to HSBC or the office
where I received my RAL proceeds check any check I have received (or
cash in the amount of the
RAL proceeds check if I have cashed the check or received a transfer to my bank account),
and comply with other requirements set by HSBC. I understand that, if
I use my right to cancel,
my finance charge will be refunded to me, HSBC will provide me with any tax refund only after
HSBC receives the refund from the IRS, and I must still pay a Refund Account Fee.
2. Security
Interest. If I receive a RAL, I grant HSBC a security interest in the
property described in the TILA
Disclosure Statement as collateral for my obligations to repay the RAL and perform my other
obligations under the
Application and this Agreement.
3. Deductions. My Prepaid Finance Charge, transmitter fees, Refund Account Fee, fees for
the completion and
electronic filing of my income tax return by my ERO, and fee for document preparation shall be
deducted from the
proceeds of my RAL.
4. Other
Charges. (a) I agree to pay a returned check charge of $19 if any check or
similar instrument I give HSBC
is not honored, (b) I agree to pay a late charge as described in the TILA Disclosure Statement
if I do not repay my
loan when due. (c) In the event that I pay my account by
telephone, I agree to pay up to a $10
fee for each such
payment HSBC reserves the right to change such fee from time to time. I may call Customer
Service for a current
fee schedule, (d) I also agree to pay any attorney’s fees and collection agency costs incurred
by HSBC or its
affiliates to collect any delinquent RAL as permitted by law.
5. Instant RAL. If I receive an Instant RAL, and if the electronic filing of my
return is rejected by the Internal
Revenue Service (“IRS”), I authorize my ERO to insert my Refund Account number at HSBC,
together with
HSBC’s routing transit number, on my signed paper returns and mail them to the IRS.
6. Application of Payments. Each payment I make on the RAL will be applied in any order
determined by HSBC.
BY SIGNING BELOW, I AGREE TO THE TERMS OF THIS LOAN AGREEMENT, AND TO THE APPLICATION, WHICH
INCLUDES AN ARBITRATION CLAUSE WHICH MAY SUBSTANTIALLY LIMIT MY RIGHTS IN THE EVENT OF A
DISPUTE. I ALSO ACKNOWLEDGE RECEIVING A COMPLETED COPY OF THIS LOAN AGREEMENT AND DISCLOSURE
STATEMENT.
CAUTION: IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT BEFORE YOU
SIGN IT.
NOTICE TO CUSTOMER
| (a) | DO NOT SIGN THIS IF IT CONTAINS ANY BLANK SPACES. | |
| (b) | YOU ARE ENTITLED TO’AN EXACT COPY OF ANY AGREEMENT YOU SIGN. | |
| (c) | YOU HAVE THE RIGHT AT ANY TIME TO PAY IN ADVANCE THE UNPAID BALANCE DUE UNDER THIS AGREEMENT AND YOU MAY BE ENTITLED TO A PARTIAL REFUND OF THE FINANCE CHARGE. |
Date:
|
(Seal) | (Seal) | ||||
| Signature of Applicant | Signature of Joint Applicant |
5
APPLICATION FOR
AN ELECTRONIC REFUND ADVANCE LOAN AND TO OPEN A DEPOSIT ACCOUNT
AN ELECTRONIC REFUND ADVANCE LOAN AND TO OPEN A DEPOSIT ACCOUNT
System Protected by U.S. Patent Nos. 4,890,228,5,193,057, and 5,963,921
This Application is submitted to HSBC Bank USA, National Association (“HSBC”) for an Electronic
Refund Advance Loan (“ERA”) and a Refund Account. As used herein, “BFC” means Block Financial
Corporation and its parents, subsidiaries and affiliates; “HSBC TFS” means HSBC Taxpayer Financial
Services Inc.; “IRS” means the Internal Revenue Service;
and “RAL” means a refund anticipation loan.
| 1. | INFORMATION | |
| I understand and confirm that the name, home address, mailing address, social security/taxpayer identification number, and date of birth which I entered into the personal information and address sections of the online tax preparation product are true and correct and are incorporated in this Application by this reference as the name, home address, mailing address, social security/taxpayer identification number, and date of birth of each applicant. | ||
| 2. | IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. TO HELP THE GOVERNMENT FIGHT THE FUNDING OF TERRORISM AND MONEY LAUNDERING ACTIVITIES, FEDERAL LAW REQUIRES ALL FINANCIAL INSTITUTIONS TO OBTAIN, VERIFY, AND RECORD INFORMATION THAT IDENTIFIES EACH PERSON WHO OPENS AN ACCOUNT. WHAT THIS MEANS FOR ME: WHEN I OPEN AN ACCOUNT, YOU WILL ASK FOR MY NAME, ADDRESS, DATE OF BIRTH, AND OTHER INFORMATION THAT WILL ALLOW YOU TO IDENTIFY ME. YOU MAY ALSO SEEK TO VERIFY MY IDENTITY THROUGH NON-DOCUMENTARY METHODS. | |
| 3. | Payment Instructions |
| A. | If I receive an ERA, I understand I am to receive my ERA proceeds via direct deposit into the bank account that I will designate on the Direct Deposit screen of this online tax preparation product application during the Electronic Filing process, and I authorize HSBC to direct deposit my funds to that designated account. | ||
| B. | If my refund is greater than my ERA, I understand I am to receive my excess funds via direct deposit into the bank account that I previously designated on the Direct Deposit screen of this online tax preparation product application and I authorize HSBC to direct deposit my funds to that designated account. |
| 4. | HSBC ERA DISCLOSURE STATEMENT: | |
| The FINANCE CHARGE for my ERA is set forth on my Truth in Lending Disclosure. I know that even if my ERA is denied, I am responsible for my electronic filing, as applicable. I am also responsible for the repayment of my ERA whether or not my tax refund it paid to my account with HSBC in whole or in part. I understand that my income tax return can be filed etectronically without obtsining an ERA and, subject to IRS processing, the usual time within which I can expect to receive a refund check If I file electronically and without an ERA is within approximately three weeks from the date I file my return. The IRS normally mikes an electronic deposit to an average of about 12 days after an electronic filing. Alternatively, if I elect to obtain and am approved for an ERA, the loan proceeds usually will be made available to me within approximately 1-2 days of my loan application. | ||
| The usual duration of an ERA is approximately II days from the date of approval of the ERA. The following are examples of the estimated ANNUAL PERCENTAGE RATE (“APR”) and ERA FINANCE CHARGES on ERAs of varying amounts based on II-day maturity periods. Because the APR on an ERA may be high in certain cases relative to other sources of credit, 1 understand that it may cost less to use such sources; e.g., credit cards, equity lines, etc., instead of an ERA. |
Example Loan Amount |
$ | 500 | $ | 750 | $ | 1 ,000 | $ | 1,500 | $ | 2,000 | $ | 3,000 | $ | 4,000 | $ | 5,000 | |
ERA Finance Charge * |
$ | 18 | $ | 28 | $ | 28 | $ | 58 | $ | 58 | $ | 88 | $ | 98 | $ | 98 | |
Estimated Annual
Percentage Rate |
124 | %e | 129 | %e | 96 | %e | 133 | %e | 99 | %e | 100 | %e | 8.3 | %e | 66 | %e |
| * | I understand I will be given disclosures which will show the actual finance charge and other charges applicable to my ERA transaction. “e” = estimate |
| 5. | Applicable Law. This Application and all the other documents executed in connection with this Application or my ERA (collectively, “Documents”), shall be governed by and construed, interpreted, and enforced in accordance with federal law and, to the extent state law applies, the law of the state of Delaware (without reference to conflict of laws principles). | |
| 6. | Important Information About ERAs . I understand that: (a) I can file my federal income tax return electronically without obtaining an ERA; (b) the IRS will send me a refund check or electronically deposit my refund to my existing bank account; (c) the IRS normally makes en electronic deposit in an average of about 12 days after an electronic filing; (d) HSBC tries to initiate the direct deposit of proceeds of an ERA on the first business day after application; (e) HSBC cannot guarantee when any proceeds of an ERA will be available to me; and (f) a ERA may cost substantially more than another type of loan I might obtain. | |
| 7. | Deposit Authorization. (a) After I submit my Application, BFC will electronically transmit my tax return to the IRS and my Application to HSBC. I understand that 1 will authorize or agree to an IRS Transmittal Form 8453 or IRS e-file signature authorization (“Deposit Authorization”) as part of my Application and electronic tax filing, and that the Deposit Authorization and this Application provide an irrevocable agreement to have my tax refund disbursed to HSBC, and irrevocably transfers to HSBC all my rights, title, and interest in the proceeds of my tax refund for purposes of the ERA I have requested and other purposes authorized by this Application. (b) If my Application is denied or cancelled, and HSBC receives my tax refund, HSBC will forward to me promptly any proceeds of my refund after deducting amounts permitted by this Agreement. (c) If for any reason, any part of the anticipated tax refund is disallowed or offset by the IRS, or if I should receive a refund check in the mail, I will advise HSBC immediately and promptly pay HSBC any amounts owing with respect to my Application or an ERA, and pay BFC any fees owed to them involving my tax return. | |
| 8. | Refund Account. (a) I request that a deposit account be opened (“Refund Account”) at HSBC upon receipt of my tax refund for the purposes of ensuring the repayment of my ERA and other amounts described in the Documents. The Annual Percentage Yield and interest rate on the Refund Account will be 0%. This means I will not receive any interest on funds in the Refund Account. I understand that I cannot make withdrawals from the Refund Account and that the funds in the Refund Account will be disbursed only as expressly provided in the Documents. (b) HSBC may deduct any amounts I owe HSBC or BFC from my tax refund, any funds received in the Refund Account, and any proceeds of an ERA. I am required to pay all fees to BFC for services rendered by BFC when HSBC electronically transfers my proceeds to me. If an electronic transfer of proceeds is not made available to me because I do not receive a tax refund, then I am required to pay all fees to BFC for services rendered by BFC on demand. HSBC also may withdraw amounts deposited into the Refund Account from my tax refund to disburse money to me in accordance with my Application, (c) I will not receive a periodic statement for the Refund Account, but I will receive notice if funds in the Refund Account are not sufficient to repay my ERA or are used for any purpose other than repayment of my ERA or disbursement to me. HSBC may, immediately after disbursement of all funds in the Refund Account, close the account without further notice to or authorization from me. | |
| 9. | Refund Account Fee. I will pay HSBC a fee of $11.95 for the administration of the Refund Account and any disbursements to me from that account (“Refund Account Fee”). I am obligated to pay the Refund Account Fee after the Deposit Authorization is filed with the IRS and is imposed regardless of whether (a) I apply for an ERA or (b) my Application is approved or denied. The Refund Account Fee is not imposed directly or indirectly as an incident to or condition of any extension of credit. I can avoid the Refund Account Fee if I direct that my tax refund not be deposited to HSBC before filing my Deposit Authorization with the IRS. | |
| 10. | Collections. In consideration of the ease and convenience of the following method of paying any delinquent debt I owe or the other applicant owes to HSBC, HSBC TFS, my electronic return originator (“ERO”) for prior yean, BFC, or Bank One, River City Bank, First Security Bank, Republic Bank or Santa Barbara Bank & Trust (the “Other ERA or RAL Lenders”), and provided that such debt has not been discharged in bankruptcy, I authorize and direct the repayment of such debt, calculated as of the date of my Application, by means of (a) having such debt deducted from the proceeds of my ERA, or (b) having my request for an ERA denied or the amount for which I have applied reduced and having such debt repaid to those entitles by offset or otherwise from my lax refund directly transmitted into my Refund Account at HSBC. If I owe delinquent debt to more than one of the entities listed above, I authorize and direct HSBC to pay such debts in the following order: HSBC, HSBC TFS, Other ERA or RAL Lenders, ERO, and BFC, I also authorize and instruct HSBC and the Other ERA or RAL Lenders to disclose to each other Information about their respective credit experiences concerning my present and prior ERAs, refund anticipation loans (“RALs”), or similar financial services, and my prior tax returns. |
2
PLEASE
NOTE: If I have delinquent debt, I understand that HSBC or HSBC TFS may be
acting as a
debt collector hereunder to collect a debt and that any information obtained will be used for
that
purpose.
| 11. | No Fiduciary/Agency Duty. I understand that BFC is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction and has no other duties to me beyond the transmission of my tax return information to HSBC, and the electronic filing of my tax return with the IRS and/or state taxing authority. I understand that BFC or an affiliate of BFC has the right to purchase an interest in my ERA issued by HSBC. I further understand that BFC or an affiliate of BFC may receive payments from HSBC or its affiliates in connection with ERAs. I also understand that HSBC is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction. | |
| 12. | Disclosure Information. (a) “Information” means my federal and state income tax returns for the tax year 2004, any information obtained in connection with my tax return (including information relating to a possible offset of my tax refund or the possibility that my tax return is incorrect), and any information relating to my Application for an BRA or similar financial service I have received or requested from HSBC. (b) “Authorized Parties” means HSBC, HSBC TFS, BFC, my Transmitter, and their respective affiliates and agents, and includes the Fraud Service Bureau) operated for HSBC. (c) The Authorized Parties may share Information to process my Application, to provide ERAs to me, to collect delinquent ERAs or BFC fees, to prevent fraud, and to otherwise administer or promote the program for ERAs. (d) The Authorized Parties may disclose Information to the IRS, state tax agencies and other financial institutions that provide ERAs or other financial services. (e) The Authorized Parties may call, or input my Information on any website of, the IRS or state tax agencies in connection with my Application to, among other things, determine the status of my fax return. The IRS and state tax agencies may disclose information about me and my tax returns to the Authorized Parties, (f) BFC may not use or disclose Information for any purpose, except as permitted under Treas, Reg. Sec. 301.7216-2 or as provided herein. (f) I consent to HSBC sharing information as provided in the Privacy Policy set forth in Section 18. (g) HSBC will be my creditor. | |
| 13. | Service Fees. (a) Reissued Check Fee: I agree to pay $10 each time that a check is reissued at my request for my reason. If I request that such a check be sent by overnight mail, I agree to pay the charges for sending it by overnight mail. (b) Document Fee: If I ask for a copy of my Application, loan agreement, billing statement or other document, I may be charged $ 10 per document. | |
| 14. | Arbitration Provision. Any claim, dispute or controversy between me and HSBC (at specifically defined below far purposes of this Arbitration Provision), whether in contract or tort (intentional or otherwise), whether pre-existing, present or future, and including constitutional, statutory, common law, regulatory, and equitable claims in any way relating to (a) any of these or any other Documents or any ERA that I have previously requested or received from HSBC, (b) advertisements, promotions, or oral or written statements related to this or any other Application for a RAL or any ERA that I have previously requested or received from HSBC, (c) the relationship of HSBC and me relating to any of these or any other Documents or any ERA that I have previously requested or received from HSBC; and (d) except as provided below, the validity, enforceability or scope of this Arbitration Provision or any part thereof, including, but not limited to, the issue whether any particular claim, dispute or controversy must be submitted to arbitration (collectively the “Claim”), shall be resolved, upon the election of either me or HSBC, by binding arbitration pursuant to this Arbitration Provision and the applicable rules of the American Arbitration Association (“AAA”) or the National Arbitration Forum (“NAF”) in effect at the time the Claim is filed. I shall have the right to select one of these arbitration administrators (the “Administrator”). The arbitrator must be a lawyer with more than ten (10) years of experience or a retired or former judge. In the event of a conflict between this Arbitration Provision and the rules of the Administrator, this Arbitration Provision shall govern. In the event of a conflict between this Arbitration Provision and the balance of this Application or any other Documents, this Arbitration Provision shall govern. Notwithstanding any language in this Arbitration Provision to the contrary, no arbitration may be administered, without the consent of all parties to the arbitration, by any organization that has in place a formal or informal policy that is inconsistent with and purports to override the terms of this Arbitration Provision, including the Class Action Waiver Provision defined below. | |
| HSBC hereby agrees not to invoke its right to arbitrate an individual Claim I may bring in small claims court or an equivalent court, if any, so long as the Claim is pending only in that court. No class actions or private attorney general actions in court or in arbitration or joinder or consolidation of claims in court or in arbitration with other persons, are permitted without the consent of HSBC and me. The validity and effect of the preceding sentence (herein referred to as the “Class Action Waiver Provision”) shall be determined exclusively by a court and not by the Administrator or any arbitrator. Neither the Administrator nor any arbitrator shall have the power or authority to |
3
| waive, modify or fail to enforce the Class Action Waiver Provision, and any attempt to do so, whether by role, policy, arbitration decision or otherwise, shall be invalid and unenforceable. | |||
| Any arbitration hearing that I attend will take place in a location that is reasonably convenient for me: On any Claim I file, I will pay the first $50.00 of the filing fee. At my request, HSBC will pay the remainder of the filing fee and any administrative or hearing fees charged by the Administrator, up to $1,500.00 on any Claim asserted by me in the arbitration. If I should be required to pay any additional fees to the Administrator, HSBC will consider a request by me to pay all or part of the additional fees; however, HSBC shall not be obligated to pay any additional fees unless the arbitrator grants me an award. If the arbitrator grants an award in my favor, HSBC will reimburse me for any additional fees paid or owed by me to the Administrator up to the amount of the fees that would have been charged if the original Claim had been for the amount of the actual award in my favor. If the arbitrator issues an award in HSBCs favor, I will not be required to reimburse HSBC for any fees HSBC has previously paid to the Administrator or for which HSBC is responsible. | |||
| This Arbitration Provision is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (the “FAA”), and not by any state law concerning arbitration. The arbitrator shall follow and apply applicable substantive law to the extent consistent with the FAA, statutes of limitation and claims of privilege and shall be authorized to award all remedies permitted by applicable substantive law, including, without limitation, compensatory, statutory and punitive damages, declaratory, injunctive and other equitable relief and attorneys’ fees and costs. The arbitrator will follow rules of procedure and evidence consistent with the FAA, this Arbitration Provision and, to the extent consistent with this Arbitration Provision, the Administrator’s rules. Upon request of either party, the arbitrator shall prepare a short reasoned written opinion supporting the arbitration award. Judgment upon the award may be entered in any court having jurisdiction. The arbitrator’s award will be final and binding except for: (a) any appeal right under the FAA; and (b) any appeal of Claims involving more than $100,000. For such Claims, any party may appeal the award to a three-arbitrator panel appointed by the Administrator, which will reconsider de novo (i.e., in its entirety) any aspect or all aspects of the initial award that is appealed. The panel’s decision will be final and binding, except for any appeal right under the FAA. Unless applicable law provides otherwise, the appealing party will pay the appeal’s costs (i.e., the amounts owed to the Administrator and the arbitrators), regardless of its outcome. However, HSBC will consider in good faith any reasonable request for HSBC to bear up to the full costs of the appeal. Nothing in this Arbitration Provision shall be construed to prevent HSBC’s use of offset or other contractual rights involving payment of my income tax refund or other amount on deposit with HSBC to pay off any ERA, RAL, or similar financial service, or BFC or other fees, now or thereafter owed by me to HSBC or any Other ERA or RAL Lender or BFC or third party pursuant to the Documents or similar prior documents. | |||
| I ACKNOWLEDGE THAT I HAVE A RIGHT TO LITIGATE CLAIMS IN COURT BEFORE A JUDGE OR JURY, BUT I PREFER TO RESOLVE ANY SUCH CLAIMS THROUGH ARBITRATION AND HEREBY KNOWINGLY AND VOLUNTARILY WAIVE MY RIGHTS TO LITIGATE SUCH CLAIMS IN COURT BEFORE A JUDGE OR JURY, UPON ELECTION OF ARBITRATION BY HSBC OR BY ME. I ACKNOWLEDGE THAT I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER OF ANY CLASS OR CLAIMANTS OR AS A PRIVATE ATTORNEY GENERAL PERTAINING TO ANY CLAIM SUBJECT TO ARBITRATION. I UNDERSTAND THAT, IF I AM A MEMBER OF THE PUTATIVE CLASS IN CUMMINS, ET AL. V. H&R BLOCK, ET AL., CASE NO. 03-C-134 IN THE CIRCUIT COURT OF KANAWHA COUNTY, WV, THIS ARBITRATION CLAUSE MAY NOT ACT AS A WAIVER OF THE RIGHTS AND CLAIMS I MAY HAVE IN THAT ACTION. | |||
| This Arbitration Provision shall supersede any prior Arbitration Provisions contained in any previous ERA application or related agreement and shall survive repayment of any ERA and termination of my account; provided, however, that if I reject this Arbitration Provision as set forth below, all prior Arbitration Provisions shall remain in full force and effect. If any portion of this Arbitration Provision is deemed invalid or unenforceable, it will not invalidate the remaining portions of this Arbitration Provision. However, if a determination is made that the Class Action Waiver Provision is unenforceable, this Arbitration Provision (other than this sentence) and any prior Arbitration Provision shall be null and void. | |||
| To reject this Arbitration Provision, I must send HSBC, c/o HSBC Taxpayer Financial Services, Account Research, P.O. Box 18097, Jacksonville, FL 32229, a signed writing (“Rejection Notice”) that is received within thirty (30) days after the date I submit this Application. The Rejection Notice must identify the transaction involved and must include my name, address, and social security number and must be signed by all persons signing this Application as Applicant(s). I may send the Rejection Notice in any manner I see fit as long as it is received at the specified address within the specified time. No other methods can be used to reject the Arbitration Agreement. If the |
4
| Rejection Notice is sent on my behalf by a third party, such third party must include evidence of his or her authority to submit the Rejection Notice on my behalf. | ||
| As used in this Arbitration Provision, the term “HSBC” shall mean HSBC Bank USA, N. A., HSBC TFS, and H&R Block, Inc., and each of their parents, wholly or majority-owned subsidiaries, affiliates, or predecessors, successors, assigns and the franchisees of any of them, and each of their officers, directors, agents, and employees. | ||
| Contacting the Administrator: If I have a question about the arbitration Administrator
mentioned in this Arbitration
Provision or if I would like to obtain a copy of its arbitration rules, I can contact the
Administrator as follows:
American Arbitration Association, 335 Madison Avenue, New York, NY 10017,
www.adr.org; National Arbitration
Forum, P.O. Box 50191, Minneapolis, MN 55405. www.arb-forum.com. |
||
| 15. | Survival. The provisions of the Application shall survive the execution of any Loan Agreement and Disclosure Statement and the disbursement of funds. | |
| 16. | Miscellaneous. (a) References to “I” or “me” or “my” in the Documents shall refer to the individual submitting an income tax return through this online tax preparation product or, in the case of a joint income tax return, to each individual and to both individuals, and the obligations of such individuals under the Documents will be joint and several, and each shall be considered an applicant. In the case of joint applicants, the individual agreeing to the Documents and the consent to electronic disclosures represents that he or she also has the authority to agree to the Documents and consent on behalf of the other applicant. (b) If any provision of the Documents or part thereof is deemed invalid, such invalidity will not affect any other provision of the Documents or part thereof. (c) HSBC may obtain a consumer report on me, and other information from third parties, in connection with evaluating my Application, or collecting or reviewing my ERA or accounts. (d) Supervisory personnel of HSBC may listen to and record my telephone calls. (e) I agree that you may send any notices and billing statements to the address of the primary applicant and not to the address of the joint applicant if such address is different. (f) HSBC may transfer, sell, participate or assign all or a portion of its rights, duties and obligations to third parties, including HSBC TFS, BFC, or their affiliates, successors and assignees, without notice to me or my consent. | |
| 17. | State Notices. California residents: Married persons may apply for a separate account. Iowa Residents: NOTICE TO CONSUMER: 1. Do not sign this paper before you read it. 2. You are entitled to a copy of this paper. 30 You may prepay the unpaid balance at any time without penalty and may be entitled to receive a refund of unearned charges in accordance with the law. New York residents: Consumer reports may be requested in connection with this account or any updates, renewals, or extensions thereof. Upon my request, HSBC will inform me of the names and addresses of any consumer reporting agencies which have provided HSBC with such reports. Ohio residents: The Ohio law against discrimination requires that all creditors make credit equally available to all creditworthy customers, and that credit reporting agencies maintain separate credit histories on each individual upon request. The Ohio Civil Rights commission administers compliance with these laws. Pennsylvania residents: If this loan becomes in default, HSBC or its assignee intends to collect default charges. Utah residents: Any prepaid finance charge not exceeding 5% of the original amount of the loan shall be fully earned on the date the loan is extended, and shall be nonrefundable in the event the loan is repaid prior to the date it is due. Any additional prepaid finance charge is earned proportionally over the term of the loan, and, in the event of such prepayment, the unearned portion of such charge, calculated on a pro rata basis according to the remaining term of the loan, shall be refunded. Wisconsin residents: No provision of a marital property agreement, a unilateral statement under Wisconsin Stats. s. 766.59 or a court decree under Wisconsin Stats. s. 766.70 adversely affects the interest of the creditor unless the creditor, prior to the time the credit is granted, is furnished a copy of the agreement, statement or decree or has actual knowledge of the adverse provision when the obligation to the creditor is incurred. All obligations described herein are being incurred in the interest of my marriage or family. A married Wisconsin resident applicant must mail the name and address of his or her spouse, as well as the applicant’s name and social security number, to HSBC c/o HSBC Taxpayer Financial Services, 200 Somerset Corporate Blvd., Bridgewater, NJ 08807, within two days. | |
| 18. | Certification. | |
| I certify that the following information is true with respect to the ERA I am requesting: (1) I do not owe any tax due and/or any tax liens from prior tax years, nor have I previously filed a 2004 federal income lax return. (2) I do not have any delinquent child support, alimony payments, student loans, V.A. loans or other federally sponsored loans. (3) Presently, I do not have a petition (whether voluntary or involuntary) filed nor do I anticipate filing a petition under federal bankruptcy laws. (4) I have not had a Refund Anticipation Loan (“RAL”) or ERA with any lender, from a prior year that has been discharged in bankruptcy. (5) I have not paid any estimated tax and/or did not have any amount of my 2003 refund applied to my 2004 tax return. (6) I am not presently making regular payments to the |
5
| IRS for prior year unpaid taxes. (7) I do not have a Power of Attorney presently in effect or on file with the Internal Revenue Service (“IRS”) to direct my federal income tax refund to any third party. (8) I am not filing a 2004 federal income tax return using a substitute W-2, From 4852, or any other form of substitute wage and tax documentation, unless the source of the Form 4852 is a Military Leave and Earnings Statement. (9) I am not filing a Form 8862 (Earned Income Credit Eligibility) with my 2004 federal income tax return. (10) I am not currently incarcerated in a state or federal prison or have 2004 income earned while an inmate at a penal institution and claiming the Earned Income Credit. (11) No portion of the 2004 income I have reported is from Schedule C or C-BZ (Profit or Loss from Business). (12) If Schedule C is present, EIC claimed, and return is self prepared or other, I am a statutory employee and the W-2 indicates statutory employee in Box 15. (13) I am not filing Form 8379 (Injured Spouse Claim & Allocation) with my 2004 federal income tax return. (14) I am not filing Form 1310 (Statement of Person Claiming Refund Due Deceased Taxpayer) with the 2004 Federal Income Tax Return or filing a Federal Income Tax Return Form 1040 on behalf of deceased taxpayer (15) I do not have an amount paid with request for an extension to file on Line 68, Field 1190 of Form 1040. (16) I do not have Other Taxes on Schedule A of Form 1040.(17) Everything that I have stated in this Application is correct. |
| By clicking I AGREE, I am indicating that I fully understand that I am applying for a loan and that I have read, understand and agree to this Application, including: (a) Section 10 in which I agree that HSBC may use amounts received from my tax refund to pay delinquent debts I owe HSBC or others; and (b) Section 14 in which I agree, upon my or HSBC’s election, to arbitrate any Claims that I may have. I also acknowledge that I have 30 days from today’s date to reject the Arbitration Provision by following the procedure described in Section 14. If I receive an ERA, I promise to pay the amount set forth in the “Total of Payments” section on my Loan Agreement and Disclosure Statement or subsequent replacement TILA Disclosure Statement, if any, on demand or when the anticipated refund from the IRS is electronically deposited into my Refund Account, whichever comes first, and I agree to repay the ERA whether or not my tax refund is paid in whole or in part to HSBC. |
I AGREE
| Toll-Free Customer Service Number 1-800-524-0628 |
6
HSBC TAXPAYER FINANCIAL SERVICES DIVISION OF HSBC BANK USA, NATIONAL
ASSOCIATION
Privacy Statement
ASSOCIATION
Privacy Statement
Applicability
This Privacy Statement only applies to customers’ accounts with the HSBC Taxpayer Financial
Services division of HSBC Bank USA, National Association
(“HSBC”). All other HSBC accounts are
governed by the HSBC Bank USA National Association Personal Banking Policy.
Introduction
— Our Commitment to You
HSBC is proud to be part of a financial services organization that has been providing superior
products and services to its customers for many years. We greatly appreciate the trust that you and
millions of customers have placed in us, and we will protect that trust by continuing to respect
the privacy of all our applicants and customers even if our formal customer relationship ends.
How We
Handle Information we Obtain
It is important for you to know that in order to ensure that our customers get the very best
service and highest quality products, HSBC collects demographic information (like your name and
address) and credit information (like information related to your accounts with us and others).
This information comes either directly from you, for instance, from
your application and
transactions on your account; or, it may come from an outside source such as your credit bureau
report. In addition, if you visit our Internet web site, we
may collect certain information about your Internet usage.
Because
some of the information we gather is not publicly available, we take great care to ensure
that this information is kept safe from unauthorized access, and we would never share the
information in violation of any regulation or law. Because we respect your privacy and we value
your trust, the only employees or companies who can access your private personal information are
those who use it to service your account or provide services to you or to us. HSBC diligently
maintains physical, electronic and procedural safeguards that comply with applicable federal
standards to guard your private personal information and to assist us in preventing unauthorized
access to that information.
How We
Share Information with Companies Affiliated with Us
From time to time, for general business purposes such as fraud
control, or when we think it may
benefit you, we do share certain information with our affiliated companies, except as
prohibited by applicable law. These affiliated companies all provide financial services, such as
banking, consumer finance, insurance, mortgage, and brokerage services. Some examples include
companies doing business under the names Household, Beneficial, or HSBC. We may also share certain
information with non-financial service providers that become affiliated with us in the future (such
as travel, auto, or shopping clubs), except as prohibited by applicable law. The information we
share might come from your application, for instance your name, address, telephone number, social
security number, and e-mail address. Also, the information we share could include your transactions
with us or our affiliated companies (such as your account balance, payment history, and parties to
the transaction), your Internet usage, or your credit card usage. Except for Vermont residents, the
information we share could also include your assets, income, or
credit reports.
How We
Share Information under a Joint Marketing Agreement
We may also provide information to non-affiliated financial companies (such as a tax preparer,
mortgage banker or insurance service provider) with whom we have a joint marketing agreement. The
sharing of information with these types of companies is permitted by law. The information we may
share also comes from the sources described above and might include your name, address, phone
number, and account experience with us.
How We
Share Information with Other Third Parties
Except for California or Vermont residents, we also may share information with non-affiliated
companies that are able to extend special offers we feel might be of value to you. These companies
may be financial services providers (such as mortgage bankers or insurance agents) or they may be
non-financial companies (such as retailers, tax preparers, or marketing companies). These offers
are typically for products and services that you might not otherwise hear about. The information we
may provide them comes from the sources described above and might include your name, address and
phone number. You may tell us not to share information with non-affiliated companies in this way by
completing the form below. For California and Vermont residents, applicable law requires us to
obtain your permission in order to share information about you in this way, and we have chosen not
to share your information in this way.
7
We may also provide information to non-affiliated companies that perform operational, collection,
or fraud control services related to your account. The sharing of information with these types of
companies is permitted by law. Such a company might include a financial company (such as an
insurance service provider) or a non-financial company (such as a
data processor or internet
service provider) with whom we have an agreement. The information we
may share also comes from the
sources described above and might include your name, address, phone number; and account experience
with us.
Finally, we provide information about you to non-affiliated companies such as credit reporting
agencies and companies which provide services related to your account. This information sharing is
also permitted by law.
We reserve the right to change our privacy practices at any time in accordance with applicable law.
Notice of such changes will be provided if required by applicable law.
How to
Opt-Out (non-affiliated companies) (Applicable to residents of all states except California
and Vermont)
If you do not want us to share your private information with non-affiliated companies (unless we
are permitted or required by law to do so), please let us know by
simply calling 1-800-365-2641. If
you have previously informed us of your preference, you do not need
to do so again. We will be
happy to comply with your “opt-out” request, which will only apply to the HSBC account you have
designated on the form by account number. An opt-out request by any party on a joint account will
apply to all parties on the joint account. Opt-out requests will not apply to information sharing
that is permitted by law. Please allow sufficient time for us to
process your request.
How to
Opt-Out (affiliated companies) (Applicable to residents of all states
except Vermont)
If you do not want us to share your credit information (such as your credit bureau information)
with companies that are affiliated with us, please let us know by simply calling 1-800-365-2641.
If you have previously informed us of your preference, you do not
need to do so again. This request
will not apply to information about your transactions or experience with HSBC (such as account
information, account usage, or payment history), except as required by law, and will only apply to
the HSBC account you have designated on the form by account number. An opt-out request by any party
on a joint account will apply to all parties on die joint account.
Atenciòn
clientes hispanoparlantes: Esta Declaraciòn Sobre la Privacidad
proportions informaciòn
sobre còmo manejamos informaciòn personòal no publica acerca de nuestors clientes, las
circunstancias bajo las cuales podemos compartir tal informaciòn con otras personas, y còmo usted
puede pedir que no compartamos esa informaciòn con terceros que no sean afiliados nuestros. Si
quisiera que le proporcionemos una traducciòn al español de
la Declaraciòn Sobre la Privacidad en
su totalidad, sirvase comunicarse con nosotros liamàndonos gratis al 1-800-365- 2641.
8
LOAN AGREEMENT AND DISCLOSURE STATEMENT
In this Loan Agreement and Disclosure Statement (“Agreement”), “ERA” means on Electronic
Refund) Advance Loan, “HSBC” means HSBC Bank USA, National
Association, and “I”, “me” and “my”
means each person who has applied to HSBC for an ERA. “H&R Block” means each of H&R Block, Inc.,
and each of its affiliates and subsidiaries (and franchisees thereof).
Truth in Lending Act Disclosure Statement
1.
|
Amount Financed (the amount of credit provided to me or on my behalf) | $ | ||
2.
|
FINANCE CHARGE (the dollar amount the credit win cost me) | $ | ||
3.
|
Total of Payments (the amount I will have paid after I have made all payments as scheduled) | $ | ||
4.
|
ANNUAL PERCENTAGE RATE (the cost of my credit as a yearly rate) | %(e) |
| “e” = estimate | If line is left blank, amount is “0” |
Creditor: My creditor is HSBC Bank USA, National Association,
Demand Feature: My loan will be repayable on demand or when the anticipated tax refund is
electronically deposited in my Refund Account with HSBC, whichever is earlier.
Payment Schedule: HSBC estimates that the total loan amount will be due in a single payment
approximately 12 days from the date of this Agreement
Security Interest: I am providing HSBC with a security interest in my tax refund payment by
the IRS, and, except for Virginia residents, in all funds deposited in the Refund Account and that
Refund Account.
Late Charge: A late charge equal to 1.5% of the unpaid Total of Payments may be imposed on
the date 35 days after payment of ray loan is demanded, and on the same date of each succeeding
month (or if there is no such date, the last date of the month).
Prepayment:
If I pay off early, I will not be entitled to a refund of part or all of the
Finance Charge.
Contract Reference: Refer to the Application and the Loan Agreement for additional
information about nonpayment, default, any right to accelerate the maturity of the obligation, and
any prepayment rebates or penalties.
Required
Deposit. The Annual Percentage Rate does not take into account my required deposit.
| Itemization of Amount Financed | ||||||
1.
|
Amount paid directly to me | $ | ||||
2.
|
Amount paid for my Refund Account Fee to HSBC | $ | ||||
3.
|
Amount Financed (Items 1+ 2) | $ (e) | ||||
4.
|
Prepaid FINANCE CHARGE (ERA Fee to HSBC) | $ (e) | ||||
5
|
Total ERA Amount (Items 3+4) | $ (e) | ||||
| “(e)” = estimate | If line is left blank, amount is “0” |
Loan Agreement
1.
Obligation on ERA.
(a) I am obligated, on the date I agree to this Agreement, to accept an ERA if HSBC approves my
application. My loan will begin, and HSBC will earn the finance charge, when I am approved for the
ERA and a transfer is initiated to my bank account.
(b) I
may cancel my ERA transaction, or my obligation to accept an ERA, for
up to 48 hours
after I become obligated to accept the ERA. To do so, I must return to HSBC cash in the amount of
the ERA proceeds and comply with other requirements set by HSBC. I must call the customer service
number (1-800-524-0628) for further instructions on how to return the ERA proceeds to HSBC. I
understand that, if I use my right to cancel, my finance charge will be refunded to me, HSBC will
provide me with any tax refund only after HSBC receives the refund
from the IRS, and I must still
pay a Refund Account Fee.
2.
Security Interest. If I receive a ERA, I grant HSBC a security
interest in the property I
described in the TILA Disclosure Statement as collateral for my
obligations to repay the ERA and
perform my other obligations under the Application and this Agreement.
3. Deductions. My Prepaid Finance Charge and Refund Account Fee shall be deducted from the
proceeds of my ERA.
4.
Other Charges. (a) I agree to pay a returned check charge of $19 if any check or
similar instrument I give HSBC is not honored. (b) I agree to pay a late charge as described in the
TILA Disclosure Statement if I do not repay my loan when due. (c) In the event that I pay my
account by telephone, I agree to pay up to a $10 fee for each such payment. HSBC reserves the right
to change this fee from time to time. I may call Customer Service for
a current fee schedule. (d) I
also agree to pay any attorney’s fees and collection agency costs incurred by HSBC or its
affiliates to collect any delinquent ERA as permitted by law.
5. Application of Payments. Each payment I make on the ERA will be applied in any order
determined by HSBC.
BY
CLICKING I AGREE BELOW, I AGREE TO THE TERMS OF THIS LOAN AGREEMENT. I ALSO ACKNOWLEDGE
RECEIVING A COMPLETED COPY OF THIS LOAN AGREEMENT AND DISCLOSURE STATEMENT.
2
CAUTION:
IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT BEFORE YOU
SIGN IT.
NOTICE TO CUSTOMER
NOTICE TO CUSTOMER
| (a) | DO NOT SIGN THIS IF IT CONTAINS ANY BLANK SPACES. | |
| (b) | YOU ARE ENTITLED TO AN EXACT COPY OF ANY AGREEMENT YOU SIGN. | |
| (c) | HAVE THE RIGHT AT ANY TIME TO PAY IN ADVANCE THE UNPAID BALANCE DUE UNDER THIS AGREEMENT AND YOU MAY BE ENTITLED TO A PARTIAL REFUND OF THE FINANCE CHARGE. |
I AGREE
3
References to “you” and “your” herein shall refer to the individual submitting an income tax
return through this software or, in the case of a joint return, to each individual and to both
individuals submitting the return.
By consenting below to receive information electronically, you will receive the following
information and disclosures electronically:
Application for an Electronic Refund Advance and Loan Agreement and
Disclosure Statement.
To access and/or retain these disclosures, you will need a desktop or laptop personal computer and
the following:
Windows
|
Macintosh | |
486 or faster PC
|
68030 or better (Power PC recommended) | |
Windows
95, 98, 2000, ME, NT 4.0, or XP
|
MAC OS 7.5.3 or higher | |
16 MB RAM
|
5 MB free RAM | |
30 MB disk space
|
20 MB disk space | |
640x480, 256 color monitor or better
|
640x480, 256 color monitor or better | |
Windows compatible printer
|
Macintosh compatible printer |
Does the computer you are using now satisfy these requirements?
é
Yes No
é
By clicking the “Yes” button below, you (i) agree to receive the above-referenced documents
electronically and confirm that you will download or print the disclosures for your records, (ii)
acknowledge that you can access information that is provided electronically in this program, and
(iii) acknowledge that you are providing your consent to receive electronic communications pursuant
to the Electronic Signatures in Global and National Commerce Act and intend that this statute apply
to the fullest extent possible.
é
Yes No
é
You may withdraw your consent to receiving records electronically by clicking the appropriate
“No” button above, but if you do so, you may not proceed with this transaction.
You understand that the information you have elected to receive is confidential in nature.
We are not responsible for unauthorized access by third parties to information and/or
communications provided electronically nor for any damages, including direct, indirect, special,
incidental or consequential damages, caused by unauthorized access. If you have any questions about
these disclosures, you may contact us by telephone at 1 -800-524-0628.
You have the option to receive any information provided electronically in paper form. To receive
specific information in paper form, please contact us at 1-800-524-0628. Please specify the
information you wish to be provided in paper form. Your request will only apply to those specific
items of information designated by you.
APPLICATION FOR
AN ELECTRONIC REFUND ADVANCE LOAN AND OPEN A DEPOSIT ACCOUNT
AN ELECTRONIC REFUND ADVANCE LOAN AND OPEN A DEPOSIT ACCOUNT
System
Protected by U.S. Patent Nos. 4,890,228,5,193,057, and 5,963,921
This Application is submitted to HSBC Bank USA, National Association (“HSBC”) for an Electronic
Refund Advance Loan (“ERA”) and a Refund Account. As used herein, “BFC” means Block Financial
Corporation and its parents, subsidiaries and affiliates; “HSBC TFS” means HSBC Taxpayer Financial
Services Inc.; “IRS” means the Internal Revenue Service; and “RAL” means a refund anticipation
loan.
| 1. | INFORMATION. | |
| I understand and confirm that the name, home address, mailing address, social security/taxpayer identification number, and date of birth which I entered into the personal information and address sections of the professional tax service product are true and correct and are incorporated in this Application by this reference as the name, home address, mailing address, social security/taxpayer identification number, and date of birth of each applicant. | ||
| 2. | IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. TO HELP THE GOVERNMENT FIGHT THE FUNDING OF TERRORISM AND MONEY LAUNDERING ACTIVITIES, FEDERAL LAW REQUIRES ALL FINANCIAL INSTITUTIONS TO OBTAIN, VERIFY, AND RECORD INFORMATION THAT IDENTIFIES EACH PERSON WHO OPENS AN ACCOUNT. WHAT THIS MEANS FOR ME: WHEN I OPEN AN ACCOUNT, YOU WILL ASK FOR MY NAME, ADDRESS, DATE OF BIRTH, AND OTHER INFORMATION THAT WILL ALLOW YOU TO IDENTIFY ME. YOU MAY ALSO SEEK TO VERIFY MY IDENTITY THROUGH NON-DOCUMENTARY METHODS. | |
| 3. | Payment Instructions. |
| A. | If I receive an ERA, I understand I am to receive my ERA proceeds via direct deposit into the bank account that I will designate on the direct deposit screen of this professional tax service product application during the Electronic Filing process, and I authorize HSBC to direct deposit my funds to that designated account. | ||
| B. | If my refund is greater than my ERA I understand I am to receive my excess proceeds via direct deposit into the bank account that I previously designated on the direct deposit screen and/or the express products screen of this professional tax service product application during the electronic filing process, and I authorize HSBC to direct deposit my funds to those designated accounts. |
| 4. | HSBC ERA DISCLOSURE STATEMENT: | |
| The FINANCE CHARGE for my ERA it set forth on my Truth in Lending Disclosure. I know that even if my ERA is denied, I am responsible for my electronic filing, as applicable. I am also responsible for the repayment of my ERA whether or not my tax refund is paid to my account with HSBC in whole or in part. I understand that my income tax return can be filed electronically without obtaining an ERA and, subject to IRS processing, the usual time within which I can expect to receive a refund check if I file electronically and without an ERA is within approximately three weeks from the date I file my return. The IRS normally makes an electronic deposit in an average of about 12 days after an electronic filing. Alternatively, if I elect to obtain and am approved for an ERA, the loan proceeds usually will be made available to me within approximately 1-2 days of my loan application. | ||
| The usual duration of an ERA is approximately 11 days from the date of approval of the ERA. The following are examples of the estimated ANNUAL PERCENTAGE RATE (“APR”) and ERA FINANCE CHARGES on ERAs of varying amounts based on 1l-day maturity periods. Because the APR on an ERA may be high in certain cases relative to other sources of credit, I understand that it may cost less to use such sources; e.g., credit cards, equity lines, etc., instead of an ERA. |
Example Loan Amount |
$ | 500 | $ | 750 | $ | 1,000 | $ | 1,500 | $ | 2,000 | $ | 3,000 | $ | 4,000 | $ | 5,000 | ||||||||||||||||
ERA Finance Charge* |
$ | 5 | $ | 15 | $ | 15 | $ | 45 | $ | 45 | $ | 75 | $ | 85 | $ | 85 | ||||||||||||||||
Estimated Annual Percentage Rate |
34 | %e | 68 | %e | 51 | %e | 103 | %e | 76 | %e | 85 | %e | 72 | %e | 57 | %e |
| * | “I understand I will be given disclosures which will show the actual finance charge and other charges applicable to my ERA transaction. “e”= estimate | |
| 5. | Applicable Law. This Application and all the other documents executed in connection with this Application or my ERA (collectively, “Documents”), shall be governed by and construed, interpreted, and enforced in accordance with |
| federal law and, to the extent state law applies, the law of the state of Delaware (without reference to conflict of laws principles). | ||
| 6. | Important Information About ERAs. I understand that (a) I can file my federal income tax return electronically without obtaining an ERA; (b) the IRS will send me a refund check or electronically deposit my refund to my existing bank account; (c) the IRS normally makes an electronic deposit in an average of about 12 days after an electronic filing; (d) HSBC tries to initiate the direct deposit of proceeds of an ERA on the first business day after application; (e) HSBC cannot guarantee when any proceeds of an ERA will be available to me; and (f) a ERA may cost substantially more than another type of loan I might obtain. | |
| 7. | Deposit Authorization. (a) After I submit my Application, BFC will electronically transmit my tax return to the IRS and my Application to HSBC. I understand that I will authorize or agree to an IRS Transmittal Form 8453 or IRS e- file signature authorization (“Deposit Authorization”) as part of my Application and electronic tax filing, and that the Deposit Authorization and this Application provide an irrevocable agreement to have my tax refund disbursed to HSBC, and irrevocably transfers to HSBC all my rights, title, and interest in the proceeds of my tax refund for purposes of the ERA I have requested and other purposes authorized by this Application. (b) If my Application is denied or cancelled, and HSBC receives my tax refund, HSBC will forward to me promptly any proceeds of my refund after deducting amounts permitted by this Agreement. (c) If for any reason, any part of the anticipated tax refund is disallowed or offset by the IRS, or if] should receive a refund check in the mail, I will advise HSBC immediately and promptly pay HSBC any amounts owing with respect to my Application or an ERA, and pay BFC any fees owed to them involving my tax return. | |
| 8. | Refund Account. (a) I request that a deposit account be opened (“Refund Account”) at HSBC upon receipt of my tax refund for the purposes of ensuring the repayment of my ERA and other amounts described in the Documents. The Annual Percentage Yield and interest rate on the Refund Account will be 0%. This means I will not receive any interest on funds in the Refund Account. I understand that I cannot make withdrawals from the Refund Account and that the funds in the Refund Account will be disbursed only as expressly provided in the Documents. (b) HSBC may deduct any amounts I owe HSBC or BFC from my tax refund, any funds received in the Refund Account, and any proceeds of an ERA. I am required to pay all fees to BFC for services rendered by BFC when HSBC electronically transfers my proceeds to me. If an electronic transfer of proceeds is not made available to me because I do not receive a tax refund, then I am required to pay all fees to BFC for services rendered by BFC on demand. HSBC also may withdraw amounts deposited into the Refund Account from my tax refund to disburse money to me in accordance with my Application. (c) I will not receive a periodic statement for the Refund Account, but I will receive notice if funds in the Refund Account are not sufficient to repay my ERA or are used for any purpose other than repayment of my ERA or disbursement to me. HSBC may, immediately after disbursement of all funds in the Refund Account, close the account without further notice to or authorization from me. | |
| 9. | Refund Account Fee. I will pay HSBC a fee of $24.95 for the administration of the Refund Account and any disbursements to me from that account (“Refund Account Fee”). I am obligated to pay the Refund Account Fee after the Deposit Authorization is filed with the IRS and is imposed regardless of whether (a) I apply for an ERA or (b) my Application is approved or denied. The Refund Account Fee is not imposed directly or indirectly as an incident to or condition of any extension of credit. I can avoid the Refund Account Fee if I direct that my tax refund not be deposited to HSBC before filing my Deposit Authorization with the IRS. | |
| 10. | Collections. In consideration of the case and convenience of the following method of paying any delinquent debt I owe or the other applicant owes to HSBC, HSBC TFS, my electronic return originator (“ERO”) for prior years, BFC, or Bank One, River City Bank, First Security Bank, Republic Bank or Santa Barbara Bank & Trust (the “Other ERA or RAL Lenders”), and provided that such debt has not been discharged in bankruptcy, I authorize and direct the repayment of such debt, calculated as of the date of my Application, by means of (a) having such debt deducted from the proceeds of my ERA, or (b) having my request for an ERA denied or the amount for which I have applied reduced and having such debt repaid to those entities by offset or otherwise from my tax refund directly transmitted into my Refund Account at HSBC. If I owe delinquent debt to more than one of the entities listed above, I authorize and direct HSBC to pay such debts in the following order: HSBC, HSBC TFS, Other ERA or RAL Lenders, ERO, and BFC. I also authorize and instruct HSBC and the Other ERA or RAL Lenders to disclose to each other information about their respective credit experiences concerning my present and prior ERAs, refund anticipation loans (“RALs”), or similar financial services, and my prior tax returns. | |
| PLEASE NOTE: If I have delinquent debt, I understand that HSBC or HSBC TFS may be acting as a debt collector hereunder to collect a debt and that any information obtained will be used for that purpose. |
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| 11. | No Fiduciary/Agency Duty. I understand that BFC is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction and has no other duties to me beyond the transmission of my tax return information to HSBC, and the electronic filing of my tax return with the IRS and/or state taxing authority, I understand that BFC or an affiliate of BFC has the right to purchase an interest in my ERA issued by HSBC. I further understand that BFC or an affiliate of BFC may receive payments from HSBC or its affiliates in connection with ERAs. I also understand that HSBC is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction. | |
| 12. | Disclosure Information. (a) “Information” means my federal and state income tax returns for the tax year 2004, any information obtained in connection with my tax return (including information relating to a possible offset of my tax refund or the possibility that my tax return is incorrect), and any information relating to my Application for an ERA or similar financial service I have received or requested from HSBC. (b) “Authorized Parties” means HSBC, HSBC TFS, BFC, my Transmitter, and their respective affiliates and agents, and includes the Fraud Service Bureau operated for HSBC. (c) The Authorized Parties may share Information to process my Application, to provide ERAs to me, to collect delinquent ERAs or BFC fees, to prevent fraud, and to otherwise administer or promote the program for ERAs. (d) The Authorized Parties may disclose Information to the IRS, state tax agencies and other financial institutions that provide ERAs or other financial services. (e) The Authorized Parties may call, or input my Information on any website of, the IRS or state tax agencies in connection with my Application to, among other things, determine the status of my tax return. The IRS and state tax agencies may disclose information about me and my tax returns to the Authorized Parties. (f) BFC may not use or disclose Information for any purpose, except as permitted under Treas. Reg. Sec. 301.7216-2 or as provided herein, (f) I consent to HSBC sharing information as provided in the Privacy Statement. (g) HSBC will be my creditor. | |
| 13. | Service Fees. (a) Reissued Check Fee: I agree to pay $10 each time that a check is reissued at my request for any reason. If I request that such a check be sent by overnight mail. I agree to pay the charges for sending it by overnight mail. (b) Document Fee: If I ask for a copy of my Application, loan agreement, billing statement or other document, I may be charged $10 per document. | |
| 14. | Arbitration Provision. Any claim, dispute or controversy between me and HSBC (as specifically defined below for purposes of this Arbitration Provision), whether in contract or tort (intentional or otherwise), whether pre-existing, present or future, and including constitutional, statutory, common law, regulatory, and equitable claims in any way relating to (a) any of these or any other Documents or any ERA that I have previously requested or received from HSBC, (b) advertisements, promotions, or oral or written statements related to this or any other Application for a RAL or any ERA that I have previously requested or received from HSBC, (c) the relationship of HSBC and me relating to any of these or any other Documents or any ERA that I have previously requested or received from HSBC; and (d) except as provided below, the validity, enforceability or scope of this Arbitration Provision or any part thereof, including, but not limited to, the issue of whether any particular claim, dispute or controversy must be submitted to arbitration (collectively the “Claim”), shall be resolved, upon the election of either me or HSBC, by binding arbitration pursuant to this Arbitration Provision and the applicable rules of the American Arbitration Association (“AAA”) or the National Arbitration Forum (“NAF”) in effect at the time the Claim is filed. I shall have the right to select one of these arbitration administrators (the “Administrator”). The arbitrator must be a lawyer with more than ten (10) years of experience or a retired or former judge. In the event of a conflict between this Arbitration Provision and the rules of the Administrator, this Arbitration Provision shall govern. In the event of a conflict between this Arbitration Provision and the balance of this Application or any other Documents, this Arbitration Provision shall govern. Notwithstanding any language in this Arbitration Provision to the contrary, no arbitration may be administered, without the consent of all parties to the arbitration, by any organization that has in place a formal or informal policy that is inconsistent with and purports to override the terms of this Arbitration Provision, including the Class Action Waiver Provision defined below. | |
| HSBC hereby agrees not to invoke its right to arbitrate an individual Claim I may bring in
small claims court or an equivalent court, if any, so long as the Claim is pending only in
that court. No class actions or private attorney general actions in court or in arbitration
or joinder or consolidation of claims in court or in arbitration with other persons, are
permitted without the consent of HSBC and me. The validity and effect of the preceding
sentence (herein referred to as the “Class Action Waiver Provision”) shall be determined
exclusively by a court and not by the Administrator or any arbitrator. Neither the
Administrator nor any arbitrator shall have the power or authority to waive, modify or fail
to enforce the Class Action Waiver Provision, and any attempt to do so, whether by rule,
policy, arbitration decision or otherwise, shall be invalid and
unenforceable. Any arbitration hearing that I attend will take place in a location that is reasonably convenient for me. On any Claim I file, I will pay the first $50.00 of the filing fee. At my request, HSBC will pay the remainder of the filing fee and any administrative or hearing fees charged by the Administrator, up to $1,500.00 on any Claim asserted by me in the arbitration. If I should be required to pay any additional fees to the Administrator, HSBC will consider a request by me to pay all or part of the additional fees; however, HSBC shall not be obligated to pay any additional fees unless the arbitrator grants me an award. If the arbitrator grants an award in my favor, HSBC will reimburse |
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| me for any additional fees paid or owed by me to the Administrator up to the amount of the fees that would have been charged if the original Claim had been for the amount of the actual award in my favor. If the arbitrator issues an award in HSBC’s favor, I will not be required to reimburse HSBC for any fees HSBC has previously paid to the Administrator or for which HSBC is responsible. | ||
| This Arbitration Provision is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (the “FAA”), and not by any state law concerning arbitration. The arbitrator shall follow and apply applicable substantive law to the extent consistent with the FAA, statutes of limitation and claims of privilege and shall be authorized to award all remedies permitted by applicable substantive law, including, without limitation, compensatory, statutory and punitive damages, declaratory, injunctive and other equitable relief and attorneys’ fees and costs. The arbitrator will follow rules of procedure and evidence consistent with the FAA, this Arbitration Provision and, to the extent consistent with this Arbitration Provision, the Administrator’s rules. Upon request of either party, the arbitrator shall prepare a short reasoned written opinion supporting the arbitration award. Judgment upon the award may be entered in any court having jurisdiction. The arbitrator’s award will be final and binding except for: (a) any appeal right under the FAA; and (b) any appeal of Claims involving more than $100,000. For such Claims, any party may appeal the award to a three-arbitrator panel appointed by the Administrator, which will reconsider de novo (i.e., in its entirety) any aspect or all aspects of the initial award that is appealed. The panel’s decision will be final and binding, except for any appeal right under the FAA. Unless applicable law provides otherwise, the appealing party will pay the appeal’s costs (i.e., the amounts owed to the Administrator and the arbitrators), regardless of its outcome. However, HSBC will consider in good faith any reasonable request for HSBC to bear up to the full costs of the appeal. Nothing in this Arbitration Provision shall be construed to prevent HSBC’s use of offset or other contractual rights involving payment of my income tax refund or other amount on deposit with HSBC to pay off any ERA, RAL, or similar financial service, or BFC or other fees, now or thereafter owed by me to HSBC or any Other ERA or RAL Lender or BFC or third party pursuant to the Documents or similar prior documents. | ||
| I ACKNOWLEDGE THAT I HAVE A RIGHT TO LITIGATE CLAIMS IN COURT BEFORE A JUDGE OR JURY, BUT I PREFER TO RESOLVE ANY SUCH CLAIMS THROUGH ARBITRATION AND HEREBY KNOWINGLY AND VOLUNTARILY WAIVE MY RIGHTS TO LITIGATE SUCH CLAIMS IN COURT BEFORE A JUDGE OR JURY, UPON ELECTION OF ARBITRATION BY HSBC OR BY ME. I ACKNOWLEDGE THAT I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER OF ANY CLASS OR CLAIMANTS OR AS A PRIVATE ATTORNEY GENERAL PERTAINING TO ANY CLAIM SUBJECT TO ARBITRATION. I UNDERSTAND THAT, IF I AM A MEMBER OF THE PUTATIVE CLASS IN CUMMINS, ET AL., V. H&R BLOCK, ET AL., CASE NO. 03-C-134 IN THE CIRCUIT COURT OF KANAWHA COUNTY, WV, THIS ARBITRATION CLAUSE MAY NOT ACT AS A WAIVER OF THE RIGHTS AND CLAIMS I MAY HAVE IN THAT ACTION. | ||
| This Arbitration Provision shall supersede any prior Arbitration Provisions contained in any previous ERA application or related agreement and shall survive repayment of any ERA and termination of my account; provided, however, that if I reject this Arbitration Provision as set forth below, all prior Arbitration Provisions shall remain in full force and effect. If any portion of this Arbitration Provision is deemed invalid or unenforceable, it will not invalidate the remaining portions of this Arbitration Provision. However, if a determination is made that the Class Action Waiver Provision is unenforceable, this Arbitration Provision (other than this sentence) and any prior Arbitration Provision shall be null and void. | ||
| To reject this Arbitration Provision, I must send HSBC, c/o HSBC Taxpayer Financial Services, Account Research, P.O. Box 18097, Jacksonville, FL 32229, a signed writing (“Rejection Notice”) that is received within thirty (30) days after the date I submit this Application. The Rejection Notice must identify the transaction involved and must include my name, address, and social security number and must be signed by all persons signing this Application as Applicant(s). I may send the Rejection Notice in any manner I see fit as long as it is received at the specified address within the specified time. No other methods can be used to reject the Arbitration Agreement. If the Rejection Notice is sent on my behalf by a third party, such third party must include evidence of his or her authority to submit the Rejection Notice oh my behalf. | ||
| As used in this Arbitration Provision, the term “HSBC” shall mean HSBC Bank USA, N. A., HSBC TFS, and H&R Block, Inc., and each of their parents, wholly or majority-owned subsidiaries, affiliates, or predecessors, successors, assigns and the franchisees of any of them, and each of their officers, directors, agents, and employees. | ||
| Contacting the Administrator: If I have a question about the Administrator mentioned in this Arbitration Provision or if I would like to obtain a copy of its arbitration rules, I can contact the Administrator as follows: American Arbitration Association, 335 Madison Avenue, New York, NY 10017, www.adr.org; National Arbitration Forum, P.O. Box 50191, Minneapolis, MN 55405. www.arb-forum.com. |
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| 15. | Survival. The provisions of the Application shall survive the execution of any Loan Agreement and Disclosure Statement and the disbursement of funds. |
| 16. | Miscellaneous. (a) References to “I” or “me” or “my” in the Documents shall refer to the individual submitting an income tax return through this professional tax service product or, in the case of a joint income tax return, to each individual and to both individuals, and the obligations of such individuals under the Documents will be joint and several, and each shall be considered an applicant. In the case of joint applicants, the individual agreeing to the Documents and the consent to electronic disclosures represents that he or she also has the authority to agree to the Documents and consent on behalf of the other applicant. (b) If any provision of the Documents or part thereof is deemed invalid, such invalidity will not affect any other provision of the Documents or part thereof. (c) HSBC may obtain a consumer report on me, and other information from third parties, in connection with evaluating my Application, or collecting or reviewing my ERA or accounts. (d) Supervisory personnel of HSBC may listen to and record my telephone calls. (e) I agree that you may send any notices and billing statements to the address of the primary applicant and not to the address of the joint applicant if such address is different. (f) HSBC may transfer, sell, participate or assign all or a portion of its rights, duties and obligations to third parties, including HSBC TFS, BFC, or their affiliates, successors and assignees, without notice to me or my consent. |
| 17. | State Notices. California residents: Married persons may apply for a separate account. Iowa Residents: NOTICE TO CONSUMER: 1. Do not sign this paper before you read it. 2. You are entitled to a copy of this paper. 3. You may prepay the unpaid balance at any time without penalty and may be entitled to receive a refund of unearned charges in accordance with the law. New York residents: Consumer reports may be requested in connection with this account or any updates, renewals, or extensions thereof. Upon my request, HSBC will inform me of me names and addresses of any consumer reporting agencies which have provided HSBC with such reports. Ohio residents: The Ohio law against discrimination requires that all creditors make credit equally available to all creditworthy customers, and that credit reporting agencies maintain separate credit histories on each individual upon request. The Ohio Civil Rights commission administers compliance with these laws. Pennsylvania residents: If this loan becomes in default, HSBC or its assignee intends to collect default charges. Utah residents: Any prepaid finance charge not exceeding 5% of the original amount of the loan shall be fully earned on the date the loan is extended, and shall be nonrefundable in the event the loan is repaid prior to the date it is due. Any additional prepaid finance charge is earned proportionally over the term of the loan, and, in the event of such prepayment, the unearned portion of such charge, calculated on a pro rata basis according to the remaining term of the loan, shall be refunded. Wisconsin residents: No provision of a marital property agreement, a unilateral statement under Wisconsin Stats. s. 766.59 or a court decree under Wisconsin Stats. s. 766.70 adversely affects the interest of the creditor unless the creditor, prior to the time the credit is granted, is furnished a copy of the agreement, statement or decree or has actual knowledge of the adverse provision when the obligation to the creditor is incurred. All obligations described herein are being incurred in the interest of my marriage or family. A married Wisconsin resident applicant must mail the name and address of his or her spouse, as well as the applicant’s name and social security number, to HSBC c/o HSBC Taxpayer Financial Services, 200 Somerset Corporate Blvd., Bridgewater, NJ 08807, within two days. |
| 18. | Certification. | |
| I certify that the following information is true with respect to the ERA I ant requesting: (1) I do not owe any tax due and/or any tax liens from prior tax years, nor have I previously filed a 2004 federal income tax return. (2) I do not have any delinquent child support, alimony payments, student loans, V.A. loans or other federally sponsored loans. (3) Presently, I do not have a petition (whether voluntary or involuntary) filed nor do I anticipate filing a petition under federal bankruptcy laws. (4) I have not had a Refund Anticipation Loan (“RAL”) or ERA with HSBC, or any other RAL lender, from a prior year that has been discharged in bankruptcy. (5) I have not paid any estimated tax and/or did not have any amount of my 2003 refund applied to my 2004 tax return. (6) I am not presently making regular payments to the IRS for prior year unpaid taxes. (7) I do not have a Power of Attorney presently in effect or on file with the Internal Revenue Service (“IRS”) to direct my federal income tax refund to any third patty. (8) I am not filing a 2004 federal income tax return using a substitute W-2, From 4852, or any other form of substitute wage and tax documentation, unless the source of the Form 4852 is a Military Leave and Earnings Statement. (9) I am not filing a Form 8862 (Earned Income Credit Eligibility) with my 2004 federal income tax return. (10) I am not currently incarcerated in a state or federal prison or have 2004 income earned while an inmate at a penal institution and claiming the Earned Income Credit. (11) The 2004 income I have reported is not solely from Schedule C or C-EZ (Profit or Loss from Business). (12) If Schedule C is present, E1C claimed, and return is self prepared or other, I am a statutory employee and the W-2 indicates statutory employee in Box I5. (13) I am not filing Form 8379 (Injured Spouse Claim & Allocation) with my 2004 federal income tax return. (14) I am not filing Form 1310 (Statement of Person Claiming Refund Due Deceased Taxpayer) with the 2004 Federal Income Tax Return or filing a Federal Income Tax Return Form 1040 on behalf of deceased taxpayer (15) I do not have an amount paid with request for an extension to file on Line 66, Field 1190 of Form 1040. (16) Everything that I have stated in this Application is correct. |
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By clicking I AGREE below, I am indicating that I fully understand that I am applying for a loan
and that I have read, understand and agree to this Application,
including: (a) Section 10 in which
I agree that HSBC may use amounts received from my tax refund to pay delinquent debts I owe HSBC or
others; and (b) Section 14 in which I agree, upon my or HSBC’s election, to arbitrate any Claims
that I may have. I also acknowledge that I have 30 days from today’s date to reject the Arbitration
Provision by following the procedure described in Section 14. If I receive an ERA, I promise to pay
the amount set forth in the “Total of Payments” section on my Loan Agreement and Disclosure
Statement or subsequent replacement TILA Disclosure Statement; if any, on demand or when the
anticipated refund from the IRS is electronically deposited into my Refund Account, whichever
comes first, and I agree to repay the ERA whether or not my tax
refund is paid in whole or in part to HSBC.
I AGREE
HSBC
Taxpayer Financial Services Toll-Free Customer Service Number 1-800-524-0628
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HSBC TAXPAYER FINANCIAL SERVICES DIVISION OF HSBC BANK USA, NATIONAL
ASSOCIATION
Privacy Statement
ASSOCIATION
Privacy Statement
Applicability
This Privacy Statement only applies to customers’ accounts with the HSBC Taxpayer Financial Services division of HSBC Bank USA, National Association (“HSBC”). All other HSBC accounts are governed by the HSBC Bank USA National Association Personal Banking Policy.
This Privacy Statement only applies to customers’ accounts with the HSBC Taxpayer Financial Services division of HSBC Bank USA, National Association (“HSBC”). All other HSBC accounts are governed by the HSBC Bank USA National Association Personal Banking Policy.
Introduction — Our Commitment to You
HSBC is proud to be part of a financial services organization that has been providing superior products and services to its customers for many years. We greatly appreciate the trust that you and millions of customers have placed in us, and we will protect that trust by continuing to respect the privacy of all our applicants and customers even if our formal customer relationship ends.
HSBC is proud to be part of a financial services organization that has been providing superior products and services to its customers for many years. We greatly appreciate the trust that you and millions of customers have placed in us, and we will protect that trust by continuing to respect the privacy of all our applicants and customers even if our formal customer relationship ends.
How We Handle Information we Obtain
It is important for you to know that in order to ensure that our customers get the very best service and the highest quality products, HSBC collects demographic information (like your name and address) and credit information (like information related to your accounts with us and others). This information comes either directly from you, for instance, from your application and transactions on your account; or, it may come from an outside source such as your credit bureau report. In addition, if you visit our Internet web site, we may collect certain information about your Internet usage.
It is important for you to know that in order to ensure that our customers get the very best service and the highest quality products, HSBC collects demographic information (like your name and address) and credit information (like information related to your accounts with us and others). This information comes either directly from you, for instance, from your application and transactions on your account; or, it may come from an outside source such as your credit bureau report. In addition, if you visit our Internet web site, we may collect certain information about your Internet usage.
Because some of the information we gather is not publicly available, we take great care to ensure
that this information is kept safe from unauthorized access, and we would never share the
information in violation of any regulation or law. Because we respect your privacy and we value
your trust, the only employees or companies who can access your private personal information are
those who use it to service your account or provide services to you or to us. HSBC diligently
maintains physical, electronic and procedural safeguards that comply with applicable federal
standards to guard your private personal information and to assist us in preventing unauthorized
access to that information.
How We Share Information with Companies Affiliated with Us
From time to time, for general business purposes such as fraud control, or when we think it may benefit you, we do share certain information with our affiliated companies, except as prohibited by applicable law. These affiliated companies all provide financial services, such as banking, consumer finance, insurance, mortgage, and brokerage services. Some examples include companies doing business under the names Household, Beneficial, or HSBC. We may also share certain information with non-financial service providers that become affiliated with us in the future (such as travel, auto, or shopping clubs), except as prohibited by applicable law. The information we share might come from your application, for instance your name, address, telephone number, social security number, and e-mail address. Also, the information we share could include your transactions with us or our affiliated companies (such as your account balance, payment history, and parties to the transaction), your Internet usage, or your credit card usage. Except for Vermont residents, the information we share could also include your assets, income, or credit reports.
From time to time, for general business purposes such as fraud control, or when we think it may benefit you, we do share certain information with our affiliated companies, except as prohibited by applicable law. These affiliated companies all provide financial services, such as banking, consumer finance, insurance, mortgage, and brokerage services. Some examples include companies doing business under the names Household, Beneficial, or HSBC. We may also share certain information with non-financial service providers that become affiliated with us in the future (such as travel, auto, or shopping clubs), except as prohibited by applicable law. The information we share might come from your application, for instance your name, address, telephone number, social security number, and e-mail address. Also, the information we share could include your transactions with us or our affiliated companies (such as your account balance, payment history, and parties to the transaction), your Internet usage, or your credit card usage. Except for Vermont residents, the information we share could also include your assets, income, or credit reports.
How We Share Information under a Joint Marketing Agreement
We may also provide information to non-affiliated financial companies (such as a tax preparer, mortgage banker or insurance service provider) with whom we have a joint marketing agreement. The sharing of information with these types of companies is permitted by law. The information we may share also comes from the sources described above and might include your name, address, phone number, and account experience with us.
We may also provide information to non-affiliated financial companies (such as a tax preparer, mortgage banker or insurance service provider) with whom we have a joint marketing agreement. The sharing of information with these types of companies is permitted by law. The information we may share also comes from the sources described above and might include your name, address, phone number, and account experience with us.
How We Share Information with Other Third Parties
Except for California or Vermont residents, we also may share information with non-affiliated companies that are able to extend special offers we feel might be of value to you. These companies may be financial services providers (such as mortgage bankers or insurance agents) or they may be non-financial companies (such as retailers, tax preparers, or marketing companies). These offers are typically for products and services that you might not otherwise hear about. The information we may provide them comes from the sources described above and might include your name, address and phone number. You may tell us not to share information with non-affiliated companies in this way by completing the form below. For California and Vermont residents, applicable law requires us to obtain your permission in order to share information about you in this way, and we have chosen not to share your information in this way.
Except for California or Vermont residents, we also may share information with non-affiliated companies that are able to extend special offers we feel might be of value to you. These companies may be financial services providers (such as mortgage bankers or insurance agents) or they may be non-financial companies (such as retailers, tax preparers, or marketing companies). These offers are typically for products and services that you might not otherwise hear about. The information we may provide them comes from the sources described above and might include your name, address and phone number. You may tell us not to share information with non-affiliated companies in this way by completing the form below. For California and Vermont residents, applicable law requires us to obtain your permission in order to share information about you in this way, and we have chosen not to share your information in this way.
We may also provide information to non-affiliated companies that perform operational, collection,
or fraud control services related to your account. The sharing of information with these types of
companies is permitted by law. Such a company might include a financial company (such as an
insurance service provider) or a non-financial company (such as a data processor or internet
service provider) with whom we have an agreement. The information
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we may
share also comes from the sources described above and might include your name, address, phone
number, and account experience with us.
Finally, we provide information about you to non-affiliated companies such as credit reporting
agencies and companies which provide services related to your account. This information sharing is
also permitted by law.
We reserve the right to change our privacy practices at any time in accordance with applicable law.
Notice of such changes will be provided if required by applicable law.
How to Opt-Out (non-affiliated companies) (Applicable to residents of all states except California
and Vermont)
If you do not want us to share your private information with non-affiliated companies (unless we are permitted or required by law to do so), please let us know by simply calling 1-800-365-2641. If you have previously informed us of your preference, you do not need to do so again. We will be happy to comply with your “opt-out” request, which will only apply to the HSBC account you have designated on the form by account number. An opt-out request by any party on a joint account will apply to all parties on the joint account. Opt-out requests will not apply to information sharing that is permitted by law. Please allow sufficient time for us to process your request.
If you do not want us to share your private information with non-affiliated companies (unless we are permitted or required by law to do so), please let us know by simply calling 1-800-365-2641. If you have previously informed us of your preference, you do not need to do so again. We will be happy to comply with your “opt-out” request, which will only apply to the HSBC account you have designated on the form by account number. An opt-out request by any party on a joint account will apply to all parties on the joint account. Opt-out requests will not apply to information sharing that is permitted by law. Please allow sufficient time for us to process your request.
How to Opt-Out (affiliated companies) (Applicable to residents of all states except Vermont)
If you do not want us to share your credit information (such as your credit bureau information) with companies that are affiliated with us, please let us know by simply calling 1-800-365-2641. If you have previously informed us of your preference, you do not need to do to again. This request will not apply to information about your transactions or experience with HSBC (such as account information, account usage, or payment history), except as required by law, and will only apply to the HSBC account you have designated on the form by account number. An opt-out request by any party on a joint account will apply to all parties on the joint account.
If you do not want us to share your credit information (such as your credit bureau information) with companies that are affiliated with us, please let us know by simply calling 1-800-365-2641. If you have previously informed us of your preference, you do not need to do to again. This request will not apply to information about your transactions or experience with HSBC (such as account information, account usage, or payment history), except as required by law, and will only apply to the HSBC account you have designated on the form by account number. An opt-out request by any party on a joint account will apply to all parties on the joint account.
Atenciòn
clientes hispanoparlantes: Esta Declaratiòn Sobre la Privacidad
proporciona informaciòn
sobre còmo manejamos informaciòn personal no publica acerca de nuestors clientes, las
circunstancias bajo las cuales podemos compartir tal informaciòn con otras personas, y còmo usted
puede pedir que no compartamos esa informaciòn con terceros que no scan afiliados nuestros. Si
quisiera que le proporcionemos una traducciòn al espatiol de la Declaraiòn Sobre la Privacidad en
su totalidad, sirvase comunicarse con nosotros liamàndonos
gratis al
1-800-365-2641.
1-800-365-2641.
8
LOAN AGREEMENT AND DISCLOSURE STATEMENT
In this Loan Agreement and Disclosure Statement (“Agreement”), “ERA” means an Electronic Refund
Advance Loan, “HSBC” means HSBC Bank USA, National Association, and “I”, “me” and “my” means each
person who has applied to HSBC for an ERA. “H&R Block” means each of H&R Block, Inc., and each of
its affiliates and subsidiaries (and franchisees thereof).
Truth in Lending Act Disclosure Statement
1.
|
Amount Financed (the amount of credit provided to me or on my behalf) | $ | ||
2.
|
FINANCE CHARGE (the dollar amount the credit will cost me) | $ | ||
3.
|
Total of Payments (the amount I will have paid after I have made all payments as scheduled) | $ | ||
4.
|
ANNUAL PERCENTAGE RATE (the cost of my credit as a yearly rate) | % (e) | ||
| “e” = estimate | If line is left blank, amount is “0” |
Creditor: My creditor is HSBC Bank USA, National Association.
Demand
Feature: My loan will be repayable on demand or when the anticipated tax refund is
electronically deposited in my Refund Account with HSBC, whichever is earlier.
Payment Schedule: HSBC estimates that the total loan amount will be due in a single payment
approximately 12 days from the date of this Agreement.
Security Interest: I am providing HSBC with a security interest in my tax refund payment by
the IRS, and, except for Virginia residents, in all funds deposited in the Refund Account and that
Refund Account.
Late
Charge: A late charge equal to 1.5% of the unpaid Total of Payments may be imposed on
the date 35 days after payment of my loan is demanded, and on the same date of each succeeding
month (or if there is no such date, the last date of the month).
Prepayment:
If I pay off early, I will not be entitled to a refund of part or all of the
Finance Charge.
Contract Reference: Refer to the Application and the Loan Agreement for additional
information about nonpayment, default, any right to accelerate the maturity of the obligation, and
any prepayment rebates or penalties.
Required Deposit: The Annual Percentage Rate does not take into account my required
deposit.
Itemization of Amount Financed
1.
|
Amount paid directly to me | $ (e) | ||
2.
|
Amount paid for my Refund Account Fee to HSBC | $ | ||
3.
|
Amount paid for Tax Prep to H&R Block | $ | ||
4.
|
Amount paid for debt owed to H&R Block | $ | ||
5.
|
Amount paid for System Administration Fee to H&R Block | $ | ||
6.
|
Amount paid for Peace of Mind to H&R Block | $ | ||
7.
|
Amount paid for E Filing to H&R Block | $ | ||
8.
|
Amount Financed (Items 1+2+3+4+5+6+7) | $ (e) | ||
9.
|
Prepaid FINANCE CHARGE (ERA Fee to HSBC) | $ (e) | ||
10.
|
Total ERA (Items 8+9) | $ (e) | ||
| “(e)” = estimate | If line is left blank, amount is “0” |
Loan Agreement
1. Obligation on ERA.
(a) I am obligated, on the date I agree to this Agreement, to accept an ERA if HSBC approves my
application, unless HSBC approves me for a smaller ERA than the amount set forth in the Total of
Payments section in the TILA Disclosure Statement above. If I am approved for a smaller ERA, I will
be provided with a replacement TILA Disclosure Statement and I will be obligated to accept the
smaller ERA if I accept the ERA proceeds. My loan will begin, and HSBC will earn the finance
charge, when I am approved for the ERA and a transfer is initiated to my bank account.
(b) I may cancel my ERA transaction, or my obligation to accept a ERA, for up to 48 hours after I
become obligated to accept the ERA. To do so, I must return to HSBC cash in the amount of the ERA
proceeds and comply with other requirements set by HSBC. I must call the customer service number
(1-800-524-0628) for further instructions on how to return the ERA proceeds to HSBC. I understand
that, if I use my right to cancel, my finance charge will be refunded to me, HSBC will provide me
with any tax refund only after HSBC receives the refund from the IRS, and I must still pay a Refund
Account Fee.
2. Security Interest. If I receive a ERA, I grant HSBC a security interest in the property
described in the TILA Disclosure Statement as collateral for my obligations to repay the ERA and
perform my other obligations under the Application and this Agreement.
3. Deductions. My Prepaid Finance Charge and Refund Account Fee shall be deducted from the
proceeds of my ERA.
4.
Other Charges. (a) I agree to pay a returned check charge of $ 19 if any check or
similar instrument I give HSBC is not honored. (b) I agree to pay a late charge as described in the
TILA Disclosure Statement if I do not repay my loan when due. (c) In the event that I pay my
account by telephone, I agree to pay up to a $10 fee for each such payment HSBC reserves the right
to change this fee from time to time. I may call Customer Service for a current
2
fee schedule. (d) I also agree to pay any attorney’s fees and collection agency costs incurred by
HSBC or its affiliates to collect any delinquent ERA as permitted by law.
5. Application of Payments. Each payment I make on the ERA will be applied in any order
determined by HSBC.
BY CLICKING I AGREE BELOW, I AGREE TO THE TERMS OF THIS LOAN AGREEMENT. I ALSO ACKNOWLEDGE
RECEIVING A COMPLETED COPY OF THIS LOAN AGREEMENT AND DISCLOSURE STATEMENT.
CAUTION: IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT BEFORE YOU SIGN IT. NOTICE TO
CUSTOMER
| (a) | DO NOT SIGN THIS IF IT CONTAINS ANY BLANK SPACES. | |
| (b) | YOU ARE ENTITLED TO AN EXACT COPY OF ANY AGREEMENT YOU SIGN. | |
| (c) | HAVE THE RIGHT AT ANY TIME TO PAY IN ADVANCE THE UNPAID BALANCE DUE UNDER THIS AGREEMENT AND YOU MAY BE ENTITLED TO A PARTIAL REFUND OF THE FINANCE CHARGE. |
I AGREE
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References to “you” and “your” herein shall refer to the individual submitting an income tax return
through this software or, in the case of a joint return, to each
individual and to both
individuals submitting the return.
By consenting below to receive information electronically, you will receive the following
information and disclosures electronically:
Application for an Electronic Refund Advance and Loan Agreement and Disclosure Statements.
To access and/or retain these disclosures, you will need a desktop or laptop personal computer and
the following:
| Windows | Macintosh | |
486 or faster PC
|
68030 or better (Power PC recommended) | |
Windows 95, 98, 2000, ME, NT 4.0, or XP
|
MAC OS 7.5.3 or higher | |
16 MB RAM
|
5 MB free RAM | |
30 MB disk space
|
20 MB disk space | |
640x480, 256 color monitor or better
|
640x480, 256 color monitor or better | |
Windows compatible printer
|
Macintosh compatible printer |
Does the computer you are using now satisfy these requirements?
é
Yes é
No
By clicking the “Yes” button below, you (i) agree to receive the above-referenced documents
electronically and confirm that you will download or print the disclosures for your records, (ii)
acknowledge that you can access information that is provided electronically in this program, and
(iii) acknowledge that you are providing your consent to receive electronic communications pursuant
to the Electronic Signatures in Global and National Commerce Act and intend that this statute apply
to the fullest extent possible.
é
Yes é
No
You may withdraw your consent to receiving records electronically by clicking the appropriate “No”
button above, but if you do so, you may not proceed with this transaction.
You understand that the information you have elected to receive is confidential in nature. We are
not responsible for unauthorized access by third parties to information and/or communications
provided electronically nor for any damages, including direct, indirect, special, incidental or
consequential damages, caused by unauthorized access. If you have any questions about these
disclosures, you may contact us by telephone at 1-800-524-0628.
You have the option to receive any information provided electronically in paper form. To receive
specific information in paper form, please contact us at 1-800-524-0628. Please specify the
information you wish to be provided in paper form. Your request will only apply to those specific
items of information designated by you.
APPLICATION FOR
AN ELECTRONIC REFUND ADVANCE LOAN AND TO OPEN A DEPOSIT ACCOUNT
AN ELECTRONIC REFUND ADVANCE LOAN AND TO OPEN A DEPOSIT ACCOUNT
System Protected by U.S. Patent Nos. 4,890,228,5,193,057, and 5,963,921
This Application is submitted to HSBC Bank USA, National Association (“HSBC”) for an Electronic
Refund Advance Loan (“ERA”) and a Refund Account. As used herein, “BFC” means Block Financial
Corporation and its parents, subsidiaries and affiliates; “HSBC TFS” means HSBC Taxpayer Financial
Services Inc.; “IRS” means the Internal Revenue Service; and “RAL” means a refund anticipation
loan.
| 1. | INFORMATION |
Applicant’s Name
|
Joint Applicant — Spouse (if joint return) | |
( )
|
(
)
|
|
First M.I. Last Maiden
|
First M.I. Last Maiden | |
Home Address
|
Home Address | |
Mailing Address
|
Mailing Address | |
Social
Security/Taxpayer Identification
# -
-
|
Social Security/Taxpayer Identification # - - | |
Date of Birth
/
/
|
Date of Birth / / |
| 2. | IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. TO HELP THE GOVERNMENT FIGHT THE FUNDING OF TERRORISM AND MONEY LAUNDERING ACTIVITIES, FEDERAL LAW REQUIRES ALL FINANCIAL INSTITUTIONS TO OBTAIN, VERIFY, AND RECORD INFORMATION THAT IDENTIFIES EACH PERSON WHO OPENS AN ACCOUNT. WHAT THIS MEANS FOR ME: WHEN I OPEN AN ACCOUNT, YOU WILL ASK FOR MY NAME, ADDRESS, DATE OF BIRTH, AND OTHER INFORMATION THAT WILL ALLOW YOU TO IDENTIFY ME. YOU MAY ALSO SEEK TO VERIFY MY IDENTITY THROUGH NON-DOCUMENTARY METHODS. |
| 3. | Payment Instructions |
| A. | If I receive an ERA, I understand I am to receive my ERA proceeds via direct deposit into the bank account that I will designate on the Direct Deposit screen of this software application during the Electronic Filing process, and I authorize HSBC to direct deposit my funds to that designated account. | ||
| B. | If my refund is greater than my ERA, I understand I am to receive my excess funds via direct deposit into the bank account that I previously designated on the Direct Deposit screen of this software application and I authorize HSBC to direct deposit my funds to that designated account. |
| 4. | HSBC ERA DISCLOSURE STATEMENT: | |
| The FINANCE CHARGE for my ERA is set forth on my Truth In Lending Disclosure. I know that even if my ERA is denied, I am responsible for my electronic filing, as applicable. I am also responsible for the repayment of my ERA whether or not my tax refund is paid to my account with HSBC in whole or in part. I understand that my income tax return can be filed electronically without obtaining in ERA and, subject to IRS processing, the usual time within which I can expect to receive a refund check if I file electronically and without an ERA is within approximately three weeks from the date I file my return. The IRS normally makes an electronic deposit in an average of about 12 days after an electronic filing. Alternatively, if I elect to obtain and am approved for an ERA, the loan proceeds usually will be made available to me within approximately 1-2 days of my loan application. | ||
| The usual duration of an ERA is approximately 11 days from the date of approval of the ERA. The following are examples of the estimated ANNUAL PERCENTAGE RATE (“APR”) and ERA FINANCE CHARGES on ERAs of varying amounts based on 11-day maturity periods. Because the APR on an ERA may be high in certain cases relative to other sources of credit, I understand that it may cost less to use such sources; e.g., credit cards, equity lines, etc., instead of an ERA. |
Example Loan Amount |
$ | 500 | $ | 750 | $ | 1,000 | $ | 1,500 | $ | 2,000 | $ | 3,000 | $ | 4,000 | $ | 5,000 | ||||||||||||||||
ERA Finance Charge* |
$ | 18 | $ | 28 | $ | 28 | $ | 58 | $ | 58 | $ | 88 | S98 | $ | 98 | |||||||||||||||||
Estimated Annual
Percentage Rate |
124 | %e | 129 | %e | 96 | %e | 133 | %e | 99 | %e | 100 | %e | 83 | %e | 66 | %e |
| * | I understand I will be given disclosures which will show the actual finance charge and other charges applicable to my ERA transaction. | |
| “e”= estimate | ||
| 5. | Applicable Law. This Application and all the other documents executed in connection with this Application or my ERA (collectively, “Documents”), shall be governed by and construed, interpreted, and enforced in accordance with federal law and, to the extent state law applies, the law of the state of Delaware (without reference to conflict of laws principles). | |
| 6. | Important Information About ERAs. I understand that: (a) I can file my federal income tax return electronically I without obtaining an ERA; (b) the IRS will send me a refund check or electronically deposit my refund to my existing bank account; (c) the IRS normally makes an electronic deposit in an average of about 12 days after an electronic filing; (d) HSBC tries to initiate the direct deposit of proceeds of an ERA on the first business day after application; (e) HSBC cannot guarantee when any proceeds of an ERA will be available to me; and (f) a ERA may cost substantially more than another type of loan I might obtain. | |
| 7. | Deposit Authorization. (a) After I submit my Application, BFC will electronically transmit my tax return to the IRS and my Application to HSBC. I understand that I will authorize or agree to an IRS Transmittal Form 8453 or IRS e-file signature authorization (“Deposit Authorization”) as part of my Application and electronic tax filing, and that the Deposit Authorization and this Application provide an irrevocable agreement to have my tax refund disbursed to HSBC, and irrevocably transfers to HSBC all my rights, title, and interest in the proceeds of my tax refund for purposes of the ERA I have requested and other purposes authorized by this Application. (b) If my Application is denied or cancelled, and HSBC receives my tax refund, HSBC will forward to me promptly my proceeds of my refund after deducting amounts permitted by this Agreement. (c) If for any reason, any part of the anticipated tax refund is disallowed or offset by the IRS, or if I should receive a refund check in the mail, I will advise HSBC immediately and promptly pay HSBC any amounts owing with respect to my Application or an ERA, and pay BFC any fees owed to them involving my tax return. | |
| 8. | Refund Account. (a) I request that a deposit account be opened (“Refund Account”) at HSBC upon receipt of my tax refund for the purposes of ensuring the repayment of my ERA and other amounts described in the Documents. The Annual Percentage Yield and interest rate on the Refund Account will be 0%. This means I will not receive any interest on funds in the Refund Account. 1 understand that I cannot make withdrawals from the Refund Account and that the funds in the Refund Account will be disbursed only as expressly provided in the Documents. (b) HSBC may deduct any amounts I owe HSBC or BFC from my tax refund, any funds received in the Refund Account, and any proceeds of an ERA. I am required to pay all fees to BFC for services rendered by BFC when HSBC electronically transfers my proceeds to me. If an electronic transfer of proceeds is not made available to me because I do not receive a tax refund, then I am required to pay all fees to BFC for services rendered by BFC on demand. HSBC also may withdraw amounts deposited into the Refund Account from my tax refund to disburse money to me in accordance with my Application. (c) I will not receive a periodic statement for the Refund Account, but I will receive notice if funds in the Refund Account are not sufficient to repay my ERA or are used for any purpose other than repayment of my ERA or disbursement to me. HSBC may, immediately after disbursement of all funds in the Refund Account, close the account without further notice to or authorization from me. | |
| 9. | Refund Account Fee. I will pay HSBC a fee of $11.95 for the administration of the Refund Account and any disbursements to me from that account (“Refund Account Fee”). I am obligated to pay the Refund Account Fee after the Deposit Authorization is filed with the IRS and is imposed regardless of whether (a) I apply for an ERA or (b) my Application is approved or denied. The Refund Account Fee is not imposed directly or indirectly as an incident to or condition of any extension of credit. I can avoid the Refund Account Fee if I direct that my tax refund not be deposited to HSBC before filing my Deposit Authorization with the IRS. | |
| 10. | Collections. In consideration of the ease and convenience of the following method of paying any delinquent debt I owe or the other applicant owes to HSBC, HSBC TFS, my electronic return originator (“ERO”) for prior years, BFC, or Bank One, River City Bank, First Security Bank, Republic Bank or Santa Barbara Bank & Trust (the “Other ERA or RAL Lenders”), and provided that such debt has not been discharged in bankruptcy, I authorize and direct the repayment of such debt, calculated as of the date of my Application, by means of (a) having such debt deducted from the proceeds of my ERA, or (b) having my request for an ERA denied or the amount for which I have applied reduced and having such debt repaid to those entities by offset or otherwise from my tax refund directly transmitted into my Refund Account at HSBC. If I owe delinquent debt to more than one of the entities listed above, I authorize and direct HSBC to pay such debts in the following order: HSBC, HSBC TFS, Other ERA or RAL Lenders, ERO, and BFC. 1 also authorize and instruct HSBC and the Other ERA or RAL Lenders to disclose to each other information about their |
2
respective credit experiences concerning my present and prior ERAs, refund
anticipation loans (“RALs”), or similar financial services, and my prior tax
returns.
|
||
PLEASE NOTE: If I have delinquent debt, I understand that HSBC or HSBC TFS may be acting as a debt
collector hereunder to collect a debt and that any information obtained will be used for that
purpose.
|
| 11. | No Fiduciary/Agency Duty. I understand that BFC is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction and has no other duties to me beyond the transmission of ray tax return information to HSBC, and the electronic filing of my tax return with the IRS and/or state taxing authority. I understand that BFC or an affiliate of BFC may has the right to purchase an interest in my ERA issued by HSBC. I further understand that BFC or an affiliate of BFC may receive payments from HSBC or its affiliates in connection with ERAs. I also understand that HSBC is not acting in a fiduciary, confidential, or agency capacity with respect to me in connection with this transaction. |
| 12. | Disclosure Information. (a) “Information” means my federal and state income tax returns for the tax year 2004, any information obtained in connection with my tax return (including information relating to a possible offset of my tax refund or the possibility that my tax return is incorrect), and any information relating to my Application for an ERA or similar financial service I have received or requested from HSBC. (b) “Authorized Parties” means HSBC, HSBC TFS, BFC, my Transmitter, and their respective affiliates and agents, and includes the Fraud Service Bureau operated for HSBC. (c) The Authorized Parties may share Information to process my Application, to provide ERAs to me, to collect delinquent ERAs or BFC fees, to prevent fraud, and to otherwise administer or promote the program for ERAs. (d) The Authorized Parties may disclose Information to the IRS, state tax agencies and other financial institutions that provide ERAs or other financial services, (e) The Authorized Parties may call, or input my Information on any website of, the IRS or state tax agencies in connection with my Application to, among other things, determine the status of my tax return. The IRS and state tax agencies may disclose information about me and my tax returns to the Authorized Parties. (f) BFC may not use or disclose Information for any purpose, except as permitted under Treas. Reg. See. 301.7216-2 or as provided herein. (f) I consent to HSBC sharing information as provided in the Privacy Policy set forth in Section 18. |
| 13. | Service Fees. (a) Reissued Check Fee: I agree to pay $10 each time that a check is reissued at my request for any reason. If I request that such a check be sent by overnight mail, I agree to pay the charges for sending it by overnight mail, (b) Document Fee: If I ask for a copy of my Application, loan agreement, billing statement or other document, I may be charged $10 per document. |
| 14. | Arbitration Provision. Any claim, dispute or controversy between me and HSBC (as specifically defined below for purposes of this Arbitration Provision), whether in contract or tort (intentional or otherwise), whether pre-existing, present or future, and including constitutional, statutory, common law, regulatory, and equitable claims in any way relating to (a) any of these or any other Documents or any ERA that I have previously requested or received from HSBC, (b) advertisements, promotions, or oral or written statements related to this or any other Application for a RAL or any ERA that I have previously requested or received from HSBC, (c) the relationship of HSBC and me relating to any of these or any other Documents or any ERA that I have previously requested or received from HSBC; and (d) except as provided below, the validity, enforceability or scope of this Arbitration Provision or any part thereof, including, but not limited to, the issue whether any particular claim, dispute or controversy must be submitted to arbitration (collectively the “Claim”), shall be resolved, upon the election of either me or HSBC, by binding arbitration pursuant to this Arbitration Provision and the applicable rules of the American Arbitration Association (“AAA”) or the National Arbitration Forum (“NAF”) in effect at the time the Claim is filed. I shall have the right to select one of these arbitration administrators (the “Administrator”). The arbitrator must be a lawyer with more than ten (10) years of experience or a retired or former judge. In the event of a conflict between this Arbitration Provision and the rules of the Administrator, this Arbitration Provision shall govern. In the event of a conflict between this Arbitration Provision and the balance of this Application or any other Documents, this Arbitration Provision shall govern. Notwithstanding any language in this Arbitration Provision to the contrary, no arbitration may be administered, without the consent of all parties to the arbitration, by any organization that has in place a formal or informal policy that is inconsistent with and purports to override the terms of this Arbitration Provision, including the Class Action Waiver Provision defined below. | |
| HSBC hereby agrees not to invoke its right to arbitrate an individual Claim I may bring in small claims court or an equivalent court, if any, so long as the Claim is pending only in that court. No class actions or private attorney general actions in court or in arbitration or joinder or consolidation of claims in court or in arbitration with other |
3
| persons, are permitted without the consent of HSBC and me. The validity and effect of the preceding sentence (herein referred to as the “Class Action Waiver Provision”) shall be determined exclusively by a court and not by the Administrator or any arbitrator. Neither the Administrator nor any arbitrator shall have the power or authority to waive, modify or fail to enforce the Class Action Waiver Provision, and any attempt to do so, whether by rule, policy, arbitration decision or otherwise, shall be invalid and unenforceable. | ||
| Any arbitration bearing that I attend will take place in a location that is reasonably convenient for me. On any Claim I file, 1 will pay the first $50.00 of the filing fee. At my request, HSBC will pay the remainder of the filing fee and any administrative or hearing fees charged by the Administrator, up to $ 1,500.00 on any Claim asserted by me in the arbitration. If I should be required to pay any additional fees to the Administrator, HSBC will consider a request by me to pay all or part of the additional fees; however, HSBC shall not be obligated to pay any additional fees unless the arbitrator grants me an award. If the arbitrator grants an award in my favor, HSBC will reimburse me for any additional fees paid or owed by me to the Administrator up to the amount of the fees that would have been charged if the original Claim had been for the amount of the actual award in my favor. If the arbitrator issues an award in HSBC’s favor, I will not be required to reimburse HSBC for any fees HSBC has previously paid to the Administrator or for which HSBC is responsible. | ||
| This Arbitration Provision is made pursuant to a transaction involving interstate commerce, and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (the “FAA”), and not by any state law concerning arbitration. The arbitrator shall follow and apply applicable substantive law to the extent consistent with the FAA, statutes of limitation and claims of privilege and shall be authorized to award all remedies permitted by applicable substantive law, including, without limitation, compensatory, statutory and punitive damages, declaratory, injunctive and other equitable relief and attorneys’ fees and costs. The arbitrator will follow rules of procedure and evidence consistent with the FAA, this Arbitration Provision and, to the extent consistent with this Arbitration Provision, the Administrator’s rules. Upon request of either party, the arbitrator shall prepare a short reasoned written opinion supporting the arbitration award. Judgment upon the award may be entered in any court having jurisdiction. The arbitrator’s award will be final and binding except for: (a) any appeal right under the FAA; and (b) any appeal of Claims involving more than $100,000. For such Claims, any party may appeal the award to a three-arbitrator panel appointed by the Administrator, which will reconsider de novo (i.e., in its entirety) any aspect or all aspects of the initial award that is appealed. The panel’s decision will be final and binding, except for any appeal right under the FAA. Unless applicable law provides otherwise, the appealing party will pay the appeal’s costs (i.e., the amounts owed to the Administrator and the arbitrators), regardless of its outcome. However, HSBC will consider in good faith any reasonable request for HSBC to bear up to the full costs of the appeal. Nothing in this Arbitration Provision shall be construed to prevent HSBC’s use of offset or other contractual rights involving payment of my income tax refund or other amount on deposit with HSBC to pay off any ERA, RAL, or similar financial service, or BFC or other fees, now or thereafter owed by me to HSBC or any Other ERA or RAL Lender or BFC or third party pursuant to the Documents or similar prior documents. | ||
| I ACKNOWLEDGE THAT I HAVE A RIGHT TO LITIGATE CLAIMS IN COURT BEFORE A JUDGE OR JURY, BUT I PREFER TO RESOLVE ANY SUCH CLAIMS THROUGH ARBITRATION AND HEREBY KNOWINGLY AND VOLUNTARILY WAIVE MY RIGHTS TO LITIGATE SUCH CLAIMS IN COURT BEFORE A JUDGE OR JURY, UPON ELECTION OF ARBITRATION BY HSBC OR BY ME. I ACKNOWLEDGE THAT I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER OF ANY CLASS OR CLAIMANTS OR AS A PRIVATE ATTORNEY GENERAL PERTAINING TO ANY CLAIM SUBJECT TO ARBITRATION. I UNDERSTAND THAT, IF I AM A MEMBER OF THE PUTATIVE CLASS IN CUMMINS, ET AL. V. H&R BLOCK, ET AL., CASE NO. 03-C-134 IN THE CIRCUIT COURT OF KANAWHA COUNTY, WV, THIS ARBITRATION CLAUSE MAY NOT ACT AS A WAIVER OF THE RIGHTS AND CLAIMS I MAY HAVE IN THAT ACTION. | ||
| This Arbitration Provision shall supersede any prior Arbitration Provisions contained in any previous ERA application or related agreement and shall survive repayment of any ERA and termination of my account; provided, however, that if I reject this Arbitration Provision as set forth below, all prior Arbitration Provisions shall remain in full force and effect, If any portion of this Arbitration Provision is deemed invalid or unenforceable, it will not invalidate the remaining portions of this Arbitration Provision. However, if a determination is made that the Class Action Waiver Provision is unenforceable, this Arbitration Provision (other than this sentence) and any prior Arbitration Provision shall be null and void. | ||
| To reject this Arbitration Provision, I must send HSBC, c/o HSBC Taxpayer Financial Services, Account Research, P.O. Box 18097, Jacksonville, FL 32229, a signed writing (“Rejection Notice”) that is received within thirty (30) days after the date I submit this Application. The Rejection Notice must identify the transaction involved and must include my name, address, and social security number and must be signed by all persons signing this Application as |
4
| Applicant(s). I may send the Rejection Notice in any manner I see fit as long as it is received at the specified address within the specified time. No other methods can be used to reject the Arbitration Agreement. If the Rejection Notice is sent on my behalf by a third party, such third party must include evidence of his or her authority to submit the Rejection Notice on my behalf. | ||
| As used in this Arbitration Provision, the term “HSBC” shall mean HSBC Bank USA, N. A., HSBC TFS, and H&R Block, Inc., and each of their parents, wholly or majority-owned subsidiaries, affiliates, or predecessors, successors, assigns and the franchisees of any of them, and each of their officers, directors, agents, and employees. | ||
| Contacting the Administrator: If I have a question about the Administrator mentioned in this Arbitration Provision or if I would like to obtain a copy of its arbitration rules, I can contact the Administrator as follows: American Arbitration Association, 335 Madison Avenue, New York, NY 10017, www.adr.org: National Arbitration Forum, P.O. Box 50191, Minneapolis, MN 55405. www.arb-fotum.com. |
| 15. | Survival. The provisions of the Application shall survive the execution of any Loan Agreement and Disclosure Statement and the disbursement of funds. |
| 16. | Miscellaneous. (a) References to “I” or “me” or “my” in the Documents shall refer to the individual submitting an income tax return through this software or, in the case of a joint income tax return, to each individual and to both individuals, and the obligations of such individuals under the Documents will be joint and several, and each shall be considered an applicant. In the case of joint applicants, the individual agreeing to the Documents and the consent to electronic disclosures represents that he or she also has the authority to agree to the Documents and consent on behalf of the other applicant. (b) If any provision of the Documents or part thereof is deemed invalid, such invalidity will not affect any other provision of the Documents or part thereof, (c) HSBC may obtain a consumer report on me, and other information from third parties, in connection with evaluating my Application, or collecting or reviewing my ERA or accounts. (d) Supervisory personnel of HSBC may listen to and record my telephone calls. (e) I agree that you may send any notices and billing statements to the address of the primary applicant and not to the address of the joint applicant if such address is different. (f) HSBC may transfer, sell, participate or assign all or a portion of its rights, duties and obligations to third parties, including HSBC TFS, BFC, or their affiliates, successors and assignees, without notice to me or my consent. |
| 17. | State Notices. California residents: Married persons may apply for a separate account. Iowa Residents: NOTICE TO CONSUMER: 1. Do not sign this paper before you read it. 2. You are entitled to a copy of this paper. 3. You may prepay the unpaid balance at any time without penalty and may be entitled to receive a refund of unearned charges in accordance with the law. New York residents: Consumer reports may be requested in connection with this account or any updates, renewals, or extensions thereof. Upon my request, HSBC will inform me of the names and addresses of any consumer reporting agencies which have provided HSBC with such reports. Ohio residents: The Ohio law against discrimination requires that all creditors make credit equally available to all creditworthy customers, and that credit reporting agencies maintain separate credit histories on each individual upon request. The Ohio Civil Rights commission administers compliance with these laws. Pennsylvania residents: If this loan becomes in default, HSBC or its assignee intends to collect default charges. Utah residents: Any prepaid finance charge not exceeding 5% of the original amount of me loan shall be fully earned on the date the loan is extended, and shall be nonrefundable in the event the loan is repaid prior to the date it is due. Any additional prepaid finance charge is earned proportionally over the term of the loan, and, in the event of such prepayment, the unearned portion of such charge, calculated on a pro rata basis according to the remaining term of the loan, shall be refunded. Wisconsin residents: No provision of a marital property agreement, a unilateral statement under Wisconsin State, s. 766.59 or a court decree under Wisconsin Stats. s. 766.70 adversely affects the interest of the creditor unless the creditor, prior to the time the credit is granted, is furnished a copy of the agreement, statement or decree or has actual knowledge of the adverse provision when the obligation to the creditor is incurred. All obligations described herein are being incurred in the interest of my marriage or family. A married Wisconsin resident applicant must mail the name and address of his or her spouse, as well as the applicant’s name and social security number, to HSBC c/o HSBC Taxpayer Financial Services, 20D Somerset Corporate Blvd., Bridgewater, NJ 08807, within two days. | |
| 18. | Certification. | |
| I certify that the following information is true with respect to the ERA I am requesting: (1) I do not owe any tax due and/or any tax liens from prior tax years, nor have I previously filed a 2004 federal income tax return. (2) I do not have any delinquent child support, alimony payments, student loans, V.A. loans or other federally sponsored loans. (3) Presently, I do not have a petition (whether voluntary or involuntary) filed nor do I anticipate filing a petition under federal bankruptcy laws. (4) I have not had a Refund Anticipation Loan (“RAL”) or ERA with any lender, |
5
| from a prior year that has been discharged in bankruptcy. (5) I have not paid any estimated tax and/or did not have any amount of my 2003 refund applied to my 2004 tax return. (6) I am not presently making regular payments to the IRS for prior year unpaid taxes. (7) I do not have a Power of Attorney presently in effect or on file with the Internal Revenue Service (“IRS”) to direct my federal income tax refund to any third party. (8) I am not filing a 2004 federal income tax return using a substitute W-2, From 4852, or any other form of substitute wage and tax documentation, unless the source of the Form 4852 is a Military Leave and Earnings Statement. (9) I am not filing a Form 8862 (Earned Income Credit Eligibility) with my 2004 federal income tax return. (10) I am not currently incarcerated in a state or federal prison or have 2004 income earned while an inmate at a penal institution and claiming the Earned Income Credit. (11) No portion of the 2004 income I have reported is from Schedule C or C-EZ (Profit or Loss from Business). (12) If Schedule C is present, EIC claimed, and return is self prepared or other, I am a statutory employee and the W-2 indicates statutory employee in Box 15. (13) I am not filing Form 8379 (Injured Spouse Claim & Allocation) with my 2004 federal income tax return. (14) I am not filing Form 1310 (Statement of Person Claiming Refund Due Deceased Taxpayer) with the 2004 Federal Income Tax Return or filing a Federal Income Tax Return Form 1040 on behalf of deceased taxpayer (15) I do not have an amount paid with request for an extension to file on Line 68, Field 1190 of Form 1040. (16) I do not have Other Taxes on Schedule A of Form 1040. (17) Everything that I have stated in this Application is correct | ||
| By clicking I AGREE, I am indicating that I fully understand that I am applying for a loan and that I have read, understand and agree to this Application, including: (a) Section 10 in which I agree that HSBC may use amounts received from my tax refund to pay delinquent debts I owe HSBC or others; and (b) Section 14 in which I agree, upon my or HSBC’s election, to arbitrate any Claims that I may have. I also acknowledge that I have 30 days from today’s date to reject the Arbitration Provision by following the procedure described in Section 14. If I receive an ERA, I promise to pay the amount set forth in the “Total of Payments” section on my Loan Agreement and Disclosure Statement or subsequent replacement TILA Disclosure Statement, if any, on demand or when the anticipated refund from the IRS is electronically deposited into my Refund Account, whichever comes first, and I agree to repay the ERA whether or not my tax refund is paid in whole or in part to HSBC. | ||
I AGREE
| HSBC Taxpayer Financial Services Toll-Free Customer Service Number 1-800-524-0628 |
6
HSBC TAXPAYER FINANCIAL SERVICES DIVISION OF HSBC BANK USA, NATIONAL
ASSOCIATION
Privacy Statement
ASSOCIATION
Privacy Statement
Applicability
This Privacy Statement only applies to customers’ accounts with the HSBC Taxpayer Financial
Services division of HSBC Bank USA, National Association
(“HSBC”). All other HSBC accounts are
governed by the HSBC Bank USA National Association Personal Banking Policy.
Introduction
— Our Commitment to You
HSBC is proud to be part of a financial services organization that has been providing superior
products and services to its customers for many years. We greatly appreciate the trust that you and
millions of customers have placed in us, and we will protect that trust by continuing to respect
the privacy of all our applicants and customers even if our formal customer relationship ends.
How We Handle Information we Obtain
It is important for you to know that in order to ensure that our customers get the very best
service and the highest quality products, HSBC collects demographic information (like your name and
address) and credit information (like information related to your accounts with us and others).
This information comes either directly from you, for instance, from your application and
transactions on your account; or, it may come from an outside source such as your credit bureau
report. In addition, if you visit our Internet web site, we may collect certain information about
your Internet usage.
Because some of the information we gather is not publicly available, we take great care to ensure
that this information is kept safe from unauthorized access, and we would never share the
information in violation of any regulation or law. Because we respect your privacy and we value
your trust, the only employees or
companies who can access your private personal information are those who use it to service your
account or provide services to you or to us. HSBC diligently maintains physical, electronic and
procedural safeguards that comply with applicable federal standards to guard your private personal
information and to assist us in preventing unauthorized access to that information.
How We Share Information with Companies Affiliated with Us
From time to time, for general business purposes such as fraud control, or when we think it may
benefit you, we do share certain information with our affiliated companies, except as prohibited by
applicable law. These affiliated companies all provide financial services, such as banking,
consumer finance, insurance, mortgage, and brokerage services. Some examples include companies
doing business under the names Household, Beneficial, or HSBC. We may also share certain
information with non-financial service providers that become affiliated with us in the future (such
as travel, auto, or shopping clubs), except as prohibited by applicable law. The information we
share might come from your application, for instance your name, address, telephone number, social
security number, and e-mail address. Also, the information we share could include your transactions
with us or our affiliated companies (such as your account balance, payment history, and parties to
the transaction), your Internet usage, or your credit card usage. Except for Vermont residents, the
information we share could also include your assets, income, or credit reports.
How We Share Information under a Joint Marketing Agreement
We may also provide information to non-affiliated financial companies (such as a tax preparer,
mortgage banker or insurance service provider) with whom we have a
joint marketing agreement. The
sharing of information with these types of companies is permitted by law. The information we may
share also comes from the sources described above and might include your name, address, phone
number, and account experience with us.
How We Share Information with Other Third Parties
Except for California or Vermont residents, we also may share information with non-affiliated
companies that are able to extend special offers we feel might be of value to you. These companies
may be financial services providers (such as mortgage bankers or insurance agents) or they may be
non-financial companies (such as retailers, tax preparers, or marketing companies). These offers
are typically for products and services that you might not otherwise hear about. The information we
may provide them comes from the sources described above and might include your name, address and
phone number. You may tell us not to share information with non-affiliated companies in this way by
completing the form below. For California and Vermont residents, applicable law requires us to
obtain your permission in order to share information about you in this way, and we have chosen not
to share your information in this way.
7
We may also provide information to non-affiliated companies that perform operational, collection,
or fraud control services related to your account. The sharing of information with these types of
companies is permitted by law. Such a company might include a financial company (such as an
insurance service provider) or a non-financial company (such as a data processor or internet
service provider) with whom we have an agreement. The information we may share also comes from the
sources described above and might include your name, address, phone number, and account experience
with us.
Finally, we provide information about you to non-affiliated companies such as credit reporting
agencies and companies which provide services related to your account. This information sharing is
also permitted by law.
We reserve the right to change our privacy practices at any time in accordance with applicable law.
Notice of such changes will be provided if required by applicable law.
How to Opt-Out (non-affiliated companies) (Applicable to residents of all states except California
and Vermont)
If you do not want us to share your private information with non-affiliated companies (unless we
are permitted or required by law to do so), please let us know by simply calling 1-800-365-2641. If
you have previously informed us of your preference, you do not need to do so again. We will be
happy to comply with your “opt-out” request, which will only apply to the HSBC account you have
designated on the form by account number. An opt-out request by any party on a joint account will
apply to all parties on the joint account. Opt-out requests win not apply to information sharing
that is permitted by law. Please allow sufficient time for us to
process your request.
How to Opt-Out (affiliated companies) (Applicable to residents of all states except Vermont)
If you
do not want us to share your credit information (such as your credit bureau information) with
companies that are affiliated with us, please let us know by simply calling 1-800-365-2641. If you
have previously informed us of your preference, you do not need to do so again. This request will
not apply to information about your transactions or experience with HSBC (such as account
information, account usage, or payment history), except as required by law, and will only apply to
the HSBC account you have designated on the form by account number. An opt-out request by any party
on a joint account will apply to all parties on the joint account.
Atenciòn
clientes hispanoparlantes: Esta Declaraciòn Sobre la Privacidad
proporciona informaciòn
sobre còmo manejamos informaciòn personal no publica acerca de nuestors clientes, las
circunstancias bajo las cuales podemos compartir tal informaciòn
con otras personas, y còmo usted
puede pedir que no compartamos esa informaciòn con teiceros que no scan afiliados nuestros. Si
quisiera que le proporcionemos una traducciòn al español de la
Declaraciòn Sobre la Privacidad en
su totalidad, sirvase comunicarse con nosotros llamàndonos
gratis al 1-800-365-261.
8
LOAN AGREEMENT AND DISCLOSURE STATEMENT
| In this Loan Agreement and Disclosure Statement (“Agreement”), “ERA” means an Electronic Refund Advance Loan, “HSBC” means HSBC Bank USA, National Association, and “I”, “me” and “my” means each person who has applied to HSBC for an ERA. “H&R Block” means each of H&R Block, Inc., and each of its affiliates and subsidiaries (and franchisees thereof). |
Truth in Lending Act Disclosure Statement
1. Amount Financed (the amount of credit provided to me or on my behalf) |
$ | |||
2. FINANCE CHARGE (the dollar amount the credit will cost me) |
$ | |||
3. Total of
Payments (the amount I will have paid after I have made all payments as scheduled) |
$ | |||
4. ANNUAL PERCENTAGE RATE (the cost of my credit as a yearly rate) |
%(e) | |||
| “e”= estimate | If line is left blank, amount is“0” |
Creditor: My creditor is HSBC Bank USA, National Association.
Demand Feature: My loan will be repayable on demand or when the anticipated tax refund is
electronically deposited in my Refund Account with HSBC, whichever is earlier.
Payment Schedule: HSBC estimates that the total loan amount will be due in a single payment
approximately 12 days from the date of this Agreement.
Security Interest: I am providing HSBC with a security interest in my tax refund payment by
the IRS, and, except for Virginia residents, in all funds deposited in the Refund Account and that
Refund Account.
Late Charge: A late charge equal to 1.5% of the unpaid Total of Payments may be imposed on
the date 35 days after payment of my loan is demanded, and on the same date of each succeeding
month (or if there is no such date, the last date of the month).
Prepayment:
If I pay off early, I will not be entitled to a refund of part or all of the
Finance Charge.
Contract Reference: Refer to the Application and the accompanying Loan Agreement for
additional information about nonpayment, default, any right to accelerate the maturity of the
obligation, and any prepayment rebates or penalties.
Required
Deposit: The Annual Percentage Rate does not take into account my required deposit.
Itemization of Amount Financed
1. Amount paid directly to me |
$ | |||
2. Amount paid for my Refund Account Fee to HSBC |
$ | |||
3. Amount Financed (Items 1 +2) |
$ | (e) | ||
4. Prepaid FINANCE CHARGE (ERA Fee) |
$ | (e) | ||
5. Total ERA
Amount (Items 3+4) |
$ | (e) | ||
| “(e)” = estimate | If line is left blank, amount to “0” |
Loan Agreement
1. Obligation on ERA.
(a) I am obligated, on the date I agree to this Agreement, to accept an
ERA if HSBC approves my application. My loan will begin, and HSBC will earn the
finance charge, when I am approved for the ERA and a transfer is initiated to my
bank account.
(b) I may cancel my ERA transaction, or my obligation to accept an ERA,
for up to 48 hours after I become obligated to accept the ERA. To do so, I must
return to HSBC cash in the amount of the ERA proceeds and comply with other
requirements set by HSBC. I must call the customer service number (l-800-524-0628)
for further instructions on how to return the ERA proceeds to HSBC. I understand
that, if I use my right to cancel, my finance charge will be refunded to me, HSBC
will provide me with any tax refund only after HSBC receives the refund from the
IRS, and I must still pay a Refund Account Fee.
2.
Security Interest. If I receive a ERA, I grant HSBC a security interest in
the property described in the TILA Disclosure Statement as collateral for my
obligations to repay the ERA and perform my other obligations under the Application and
this Agreement.
3. Deductions. My Prepaid Finance Charge and Refund Account Fee shall be
deducted from the proceeds of my ERA.
4. Other Charges. I agree to pay a returned check charge of $19 if any check or similar
instrument I give HSBC is not honored. (b) I agree to pay a late charge as described in the TILA
Disclosure Statement if I do not repay my loan when due. (c) In the event that I pay my account by
telephone, I agree to pay up to a $10 fee for each such payment. HSBC reserves the right to change
this fee from time to time. I may call
Customer Service for a current fee schedule. (d) I also agree to pay any attorney’s fees and
collection agency costs incurred by HSBC or its affiliates to collect any delinquent ERA as
permitted by law.
5. Application of Payments. Each payment I make on the ERA will be applied in
any order determined by HSBC.
BY CLICKING I AGREE ABOVE, I AGREE TO THE TERMS OF THIS LOAN AGREEMENT. I ALSO ACKNOWLEDGE
RECEIVING A COMPLETED COPY OF THIS LOAN AGREEMENT AND DISCLOSURE STATEMENT.
2
CAUTION: IT IS IMPORTANT THAT YOU THOROUGHLY READ THIS CONTRACT BEFORE YOU SIGN IT, NOTICE TO
CUSTOMER
| (a) | DO NOT SIGN THIS IF IT CONTAINS ANY BLANK SPACES. | |
| (b) | YOU ARE ENTITLED TO AN EXACT COPY OF ANY AGREEMENT YOU SIGN. | |
| (c) | HAVE THE RIGHT AT ANY TIME TO PAY IN ADVANCE THE UNPAID BALANCE DUE UNDER THIS AGREEMENT AND YOU MAY BE ENTITLED TO A PARTIAL REFUND OF THE FINANCE CHARGE. |
I AGREE
3
References to “you” and “your” herein shall refer to the individual submitting an income tax return
through this software or, in the case of a joint return, to each individual and to both individuals
submitting the return.
By
consenting below to receive information electronically, you will receive the following information and disclosures electronically:
Application for an Electronic Refund Advance Loan Agreement and Disclosure Statements.
To access and/or retain these disclosures, you will need a desktop or laptop personal computer and
the following:
Windows
|
Macintosh | |
486 or faster PC
|
68030 or better (Power PC recommended) | |
Windows 95, 98, 2000, ME, NT 4.0, or XP
|
MAC OS 7.5.3 or higher | |
16 MB RAM
|
5 MB free RAM | |
30 MB disk space
|
20 MB disk space | |
640x480, 256 color monitor or better
|
640x480, 256 color monitor or better | |
Windows compatible printer
|
Macintosh compatible printer |
Does the computer you are using now satisfy these requirements?
é
Yes No
é
By clicking the “Yes” button above, you (i) agree to receive the above-referenced documents
electronically and confirm that you will download or print the disclosures for your records, (ii)
acknowledge that you can access information that is provided electronically in this program, and
(iii) acknowledge that you are providing your consent to receive electronic communications pursuant
to the Electronic Signatures in Global and National Commerce Act and intend that this statute apply
to the fullest extent possible.
é
Yes No
é
You may withdraw your consent to receiving records electronically by clicking the appropriate “No”
button above, but if you do so, you may not proceed with this transaction.
You understand that the information you have elected to receive is confidential in nature. We are
not responsible for unauthorized access by third parties to information and/or communications
provided electronically nor for any damages, including direct, indirect, special, incidental or
consequential damages, caused by unauthorized access. If you have any questions about these
disclosures, you may contact us by telephone at 1-800-524-0628.
You have the option to receive any information provided electronically in paper form. To receive
specific information in paper form, please contact us at 1-800-524-0628. Please specify the
information you wish to be provided in paper form. Your request will only apply to those specific
items of information designated by you.
Exhibit 10.6
SALE AND SERVICING AGREEMENT
among
OPTION ONE OWNER TRUST 2005-9
as Issuer
as Issuer
and
OPTION ONE LOAN WAREHOUSE CORPORATION
as Depositor
as Depositor
and
OPTION ONE MORTGAGE CORPORATION
as Loan Originator and Servicer
as Loan Originator and Servicer
and
WELLS FARGO BANK, N.A.
as Indenture Trustee
as Indenture Trustee
Dated as of December 30, 2005
OPTION ONE OWNER TRUST 2005-9
MORTGAGE-BACKED NOTES
MORTGAGE-BACKED NOTES
TABLE OF CONTENTS
| Page | ||||||
| ARTICLE I | ||||||
| DEFINITIONS | ||||||
Section 1.01 |
Definitions. | 1 | ||||
Section 1.02 |
Other Definitional Provisions. | 24 | ||||
| ARTICLE II | ||||||
| CONVEYANCE OF THE TRUST ESTATE; ADDITIONAL NOTE PRINCIPAL BALANCES | ||||||
Section 2.01 |
Conveyance of the Trust Estate; Additional Note Principal Balances. | 24 | ||||
Section 2.02 |
Ownership and Possession of Loan Files. | 26 | ||||
Section 2.03 |
Books and Records Intention of the Parties. | 26 | ||||
Section 2.04 |
Delivery of Loan Documents. | 27 | ||||
Section 2.05 |
Acceptance by the Indenture Trustee of the Loans; Certain Substitutions and Repurchases; Certification by the Custodian. | 27 | ||||
Section 2.06 |
Conditions Precedent to Transfer. | 29 | ||||
Section 2.07 |
Termination or Suspension of Revolving Period. | 31 | ||||
Section 2.08 |
Correction of Errors | 31 | ||||
| ARTICLE III | ||||||
| Article III REPRESENTATIONS AND WARRANTIES | ||||||
Section 3.01 |
Representations, Warranties and Covenants of the Depositor. | 32 | ||||
Section 3.02 |
Representations, Warranties and Covenants of the Loan Originator. | 34 | ||||
Section 3.03 |
Representations, Warranties and Covenants of the Servicer. | 36 | ||||
Section 3.04 |
Reserved. | 38 | ||||
Section 3.05 |
Representations and Warranties Regarding Loans | 38 | ||||
Section 3.06 |
Purchase and Substitution. | 38 | ||||
Section 3.07 |
Dispositions. | 40 | ||||
Section 3.08 |
Loan Originator Put; Servicer Call. | 43 | ||||
Section 3.09 |
Modification of Underwriting Guidelines. | 43 | ||||
| ARTICLE IV | ||||||
| ADMINISTRATION AND SERVICING OF THE LOANS | ||||||
Section 4.01 |
Servicer’s Servicing Obligations | 44 | ||||
Section 4.02 |
Financial Statements; Other Statements and Notices. | 44 | ||||
| ARTICLE V | ||||||
| ESTABLISHMENT OF TRUST ACCOUNTS; TRANSFER OBLIGATION | ||||||
Section 5.01 |
Collection Account and Distribution Account. | 44 | ||||
Section 5.02 |
Payments to Securityholders. | 48 | ||||
| Page | ||||||
Section 5.03 |
Trust Accounts; Trust Account Property. | 49 | ||||
Section 5.04 |
Advance Account. | 51 | ||||
Section 5.05 |
Transfer Obligation Account. | 51 | ||||
Section 5.06 |
Transfer Obligation. | 52 | ||||
i
TABLE OF CONTENTS
| Page | ||||||
| ARTICLE VI | ||||||
| STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS | ||||||
Section 6.01 |
Statements. | 53 | ||||
Section 6.02 |
Specification of Certain Tax Matters. | 56 | ||||
Section 6.03 |
Valuation of Loans; Hedge Value and Retained Securities Value, Market Value Agent. | 56 | ||||
| ARTICLE VII | ||||||
| HEDGING; FINANCIAL COVENANTS | ||||||
Section 7.01 |
Hedging Instruments. | 57 | ||||
Section 7.02 |
Financial Covenants | 58 | ||||
| ARTICLE VIII | ||||||
| THE SERVICER | ||||||
Section 8.01 |
Indemnification, Third Party Claims. | 58 | ||||
Section 8.02 |
Merger or Consolidation of the Servicer. | 60 | ||||
Section 8.03 |
Limitation on Liability of the Servicer and Others. | 60 | ||||
Section 8.04 |
Servicer Not to Resign; Assignment. | 61 | ||||
Section 8.05 |
Relationship of Servicer to Issuer and the Indenture Trustee. | 61 | ||||
Section 8.06 |
Servicer May Own Securities. | 61 | ||||
Section 8.07 |
Indemnification of the Indenture Trustee, Noteholders and Noteholder Agent. | 62 | ||||
| ARTICLE IX | ||||||
| SERVICER EVENTS OF DEFAULT | ||||||
Section 9.01 |
Servicer Events of Default. | 62 | ||||
Section 9.02 |
Appointment of Successor. | 64 | ||||
Section 9.03 |
Waiver of Defaults. | 65 | ||||
Section 9.04 |
Accounting Upon Termination of Servicer. | 65 | ||||
| ARTICLE X | ||||||
| TERMINATION; PUT OPTION | ||||||
Section 10.01 |
Termination. | 65 | ||||
Section 10.02 |
Optional Termination. | 66 | ||||
Section 10.03 |
Notice of Termination. | 66 | ||||
Section 10.04 |
Put Option. | 66 | ||||
| ARTICLE XI | ||||||
| MISCELLANEOUS PROVISIONS | ||||||
Section 11.01 |
Acts of Securityholders. | 66 | ||||
Section 11.02 |
Amendment. | 67 | ||||
Section 11.03 |
Recordation of Agreement. | 67 | ||||
| Page | ||||||
Section 11.04 |
Duration of Agreement. | 67 | ||||
Section 11.05 |
Governing Law. | 68 | ||||
Section 11.06 |
Notices. | 68 | ||||
Section 11.07 |
Severability of Provisions. | 68 | ||||
Section 11.08 |
No Partnership. | 69 | ||||
ii
TABLE OF CONTENTS
| Page | ||||||
Section 11.09 |
Counterparts. | 69 | ||||
Section 11.10 |
Successors and Assigns. | 69 | ||||
Section 11.11 |
Headings. | 69 | ||||
Section 11.12 |
Actions of Securityholders. | 69 | ||||
Section 11.13 |
Non-Petition Agreement. | 70 | ||||
Section 11.14 |
Holders of the Securities. | 70 | ||||
Section 11.15 |
Due Diligence Fees, Due Diligence. | 70 | ||||
Section 11.16 |
No Reliance. | 71 | ||||
Section 11.17 |
Confidential Information. | 71 | ||||
Section 11.18 |
Conflicts. | 72 | ||||
Section 11.19 |
Limitation on Liability. | 72 | ||||
Section 11.20 |
No Agency. | 73 | ||||
| SERVICING ADDENDUM | ||||||
| SERVICING ADDENDUM | ||||||
EXHIBITS |
||||||
EXHIBIT A |
Form of Notice of Additional Note Principal Balance | |||||
EXHIBIT B |
Form of Servicer’s Remittance Report to Trustee | |||||
EXHIBIT C |
Form of S&SA Assignment | |||||
EXHIBIT D |
Piggy-Backed Loan Underwriting Criteria | |||||
EXHIBIT E |
Loan Schedule | |||||
EXHIBIT F |
Representations and Warranties Regarding the Loans | |||||
EXHIBIT G |
Servicing Addendum | |||||
EXHIBIT H |
Capital Adequacy Test | |||||
EXHIBIT I |
Quarterly Compliance Certificate Form | |||||
iii
SALE AND SERVICING AGREEMENT
This Sale and Servicing Agreement is entered into effective as of December 30, 2005, among
OPTION ONE OWNER TRUST 2005-9, a Delaware statutory trust (the “Issuer” or the
“Trust”), OPTION ONE LOAN WAREHOUSE CORPORATION, a Delaware corporation, as Depositor (in
such capacity, the “Depositor”), OPTION ONE MORTGAGE CORPORATION, a California corporation
(“Option One”), as Loan Originator (in such capacity, the “Loan Originator”) and as
Servicer (in such capacity, the “Servicer”), and WELLS FARGO BANK, N.A., a national banking
association, as Indenture Trustee on behalf of the Noteholders (in such capacity, the
“Indenture Trustee”).
WITNESSETH:
In consideration of the mutual agreements herein contained, the Issuer, the Depositor, the
Loan Originator, the Servicer and the Indenture Trustee hereby agree as follows for the benefit of
each of them and for the benefit of the holders of the Securities:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions.
Whenever used in this Agreement, the following words and phrases, unless the context otherwise
requires, shall have the meanings specified in this Article. Unless otherwise specified, all
calculations of interest described herein shall be made on the basis of a 360-day year and the
actual number of days elapsed in each Accrual Period.
Accepted Servicing Practices: The Servicer’s normal servicing practices in servicing
and administering similar mortgage loans for its own account, which in general will conform to the
mortgage servicing practices of prudent mortgage lending institutions which service for their own
account mortgage loans of the same type as the Loans in the jurisdictions in which the related
Mortgaged Properties are located and will give due consideration to the Noteholders’ reliance on
the Servicer.
Accrual Period: With respect to the Notes, the period commencing on and including the
preceding Payment Date (or, in the case of the first Payment Date, the period commencing on and
including the first Transfer Date (which first Transfer Date is the first date on which the Note
Principal Balance is greater than zero)) and ending on the day preceding the related Payment Date.
Act or Securities Act: The Securities Act of 1933, as amended.
Additional Note Principal Balance: With respect to each Transfer Date, the aggregate
Sales Prices of all Loans conveyed on such date.
Adjustment Date: With respect to each ARM, the date set forth in the related
Promissory Note on which the Loan Interest Rate on such ARM is adjusted in accordance with the
terms of the related Promissory Note.
Administration Agreement: The Administration Agreement, dated as of December 30, 2005,
between the Issuer and the Administrator.
Administrator: Option One Mortgage Corporation, in its capacity as Administrator
under the Administration Agreement.
Advance Account: The account established and maintained pursuant to Section 5.04.
Affiliate: With respect to any specified Person, any other Person controlling or
controlled by or under common control with such specified Person, including a Subsidiary of such
Person. For the purposes of this definition, “control” when used with respect to any specified
Person means the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or otherwise, and the
terms “controlling” and “controlled” have meanings correlative to the foregoing.
Agreement: This Agreement, as the same may be amended and supplemented from time to
time.
ALTA: The American Land Title Association and its successors in interest.
Appraised Value: With respect to any Loan, and the related Mortgaged Property, the
lesser of:
(i) the lesser of (a) the value thereof as determined by an appraisal made
for the originator of the Loan at the time of origination of the Loan by an appraiser who
met the minimum requirements of Fannie Mae or Freddie Mac, and (b) the value thereof as
determined by a review appraisal process which may include an automated appraisal process
consistent with the Underwriting Guidelines conducted by the Loan Originator in the event
any such review appraisal determines an appraised value more than 10% lower than the value
thereof, in the case of a Loan with a Loan-to-Value Ratio less than or equal to 80%, or
more than 5% lower than the value thereof, in the case of a Loan with a Loan-to-Value Ratio
greater than 80%, as determined by the appraisal referred to in clause (i)(a) above; and
(ii) the purchase price paid for the related Mortgaged Property by the
Borrower with the proceeds of the Loan; provided, however, that in the case of a Refinanced
Loan or a Loan originated in connection with a “lease option purchase” if the “lease option
purchase price” was set 12 months or more prior to origination, such value of the Mortgaged
Property shall be based solely upon clause (i) above.
ARM: Any Loan, the Loan Interest Rate with respect to which is subject to adjustment
during the life of such Loan.
Assignment: An LPA Assignment or S&SA Assignment.
Assignment of Mortgage: With respect to any Loan, an assignment of the related
Mortgage in blank or to Wells Fargo Bank, N.A., as custodian or trustee under the applicable
custodial agreement or trust agreement, and notice of transfer or equivalent instrument in
recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the assignment and pledge of such Mortgage.
Balloon Loan: Any Loan for which the related monthly payments, other than the monthly
payment due on the maturity date stated in the Promissory Note, are computed on the basis of a
period to full amortization ending on a date that is later than such maturity date.
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Basic Documents: This Agreement, the Administration Agreement, the Custodial
Agreement, the Indenture, the Loan Purchase and Contribution Agreement, the Master Disposition
Confirmation Agreement, the Note Purchase Agreement, the Trust Agreement, the Pricing Letter, the
Blocked Account Agreements, each Hedging Instrument, if any, and, as and when required to be
executed and delivered, the Assignments.
Blocked Account Agreements: The blocked account agreements entered into with respect
to the Collection Account/Deposit Account, the Advance Account and the Transfer Obligation Account,
each dated as of December 30, 2005, and by and among the Trust, the Servicer, the Indenture Trustee
and Mellon Bank, N.A.
Borrower: The obligor or obligors on a Promissory Note.
Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a day on which
banking institutions in New York City, California, Maryland, Minnesota, Pennsylvania, Delaware or
in the city in which the corporate trust office of the Indenture Trustee is located or the city in
which the Servicer’s servicing operations are located are authorized or obligated by law or
executive order to be closed.
Certificateholder: A holder of a Trust Certificate.
Change of Control: As defined in the Indenture.
Clean-up Call Date: The first Payment Date occurring after the end of the Revolving
Period and the date on which the Note Principal Balance declines to 10% or less of the aggregate
Note Principal Balance as of the end of the Revolving Period.
Closing Agent: As defined in the Custodial Agreement.
Closing Date: December 30, 2005.
Closing Protection Letter: A letter of indemnification with respect to a Wet Funded
Loan issued by the related title insurance company, naming the related Closing Agent and providing
for reimbursement to the Loan Originator for any loss incurred in connection with closing of such
Wet Funded Loan by such Closing Agent, which letter is effective on or before the closing of such
Wet Funded Loan.
Code: The Internal Revenue Code of 1986, as amended from time to time, and the
regulations promulgated by the United States Treasury thereunder.
Collateral Value: As defined in the Pricing Letter.
Collection Account: The account designated as such, established and maintained by the
Servicer in accordance with Section 5.01(a)(1) hereof.
Combined LTV or CLTV: With respect to any Second Lien Loan, the ratio of (a) the
outstanding Principal Balance on the related date of origination of such Loan plus the loan
constituting the first lien, to (b) the lesser of (x) the Appraised Value of the Mortgaged Property
at origination or (y) if the Mortgaged Property was purchased within 12 months of the origination
of the Loan, the purchase price of the Mortgaged Property, expressed as a percentage.
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Committed Note Principal Balance: With respect to the Notes, as of any date of
determination (a) the sum of the Additional Note Principal Balances purchased on or prior to such
date pursuant to the Note Purchase Agreement up to the Maximum Committed Note Principal Balance
less (b) all amounts previously distributed in respect of the Note Principal Balance on or prior to
such day.
Committed Purchaser: DB Structured Products, Inc. and its permitted successors and
assigns or an Affiliate thereof identified in writing by DB Structured Products, Inc. to the
Indenture Trustee and the other parties hereto, subject to the consent of the Loan Originator,
which may not be unreasonably withheld or delayed.
Conduit Purchaser: Gemini Securitization Corp., LLC, Aspen Funding Corp. and/or
Newport Funding Corp., as the case may be.
Convertible Loan: A Loan that by its terms and subject to certain conditions contained
in the related Mortgage or Promissory Note allows the Borrower to convert the adjustable Loan
Interest Rate on such Loan to a fixed Loan Interest Rate.
Custodial Agreement: The custodial agreement dated as of December 30, 2005, among the
Issuer, the Servicer, the Indenture Trustee, the Noteholder Agent and the Custodian, providing for
the retention of the Custodial Loan Files by the Custodian on behalf of the Indenture Trustee.
Custodial Loan File: As defined in the Custodial Agreement.
Custodian: The custodian named in the Custodial Agreement, which custodian shall not
be affiliated with the Servicer, the Loan Originator, the Depositor or any Subservicer. Wells Fargo
Bank, N.A., a national banking association, shall be the initial Custodian pursuant to the terms of
the Custodial Agreement.
Custodian Fee: For any Payment Date, the fee payable to the Custodian on such Payment
Date as set forth in the Custodian Fee Notice for such Payment Date, which fee shall be calculated
in accordance with the separate fee letter between the Custodian and the Servicer.
Custodian Fee Notice: For any Payment Date, the written notice provided by the
Custodian to the Servicer and the Indenture Trustee pursuant to Section 6.01, which notice shall
specify the amount of the Custodian Fee payable on such Payment Date.
Daily Interest Accrual Amount: With respect to each day and the related Accrual
Period, the interest accrued at the Note Interest Rate with respect to such Accrual Period on the
Note Principal Balance as of the preceding Business Day after giving effect to all changes to the
Note Principal Balance on or prior to such preceding Business Day.
Deemed Cured: With respect to the occurrence of a Rapid Amortization Trigger, when the
condition that originally gave rise to the occurrence of such trigger has not continued for 20
consecutive days, or if the occurrence of such Rapid Amortization Trigger has been waived in
writing by the Noteholder Agent.
Default: Any occurrence that is, or with notice or the lapse of time or both would
become, an Event of Default.
Defaulted Loan: With respect to any Determination Date, any Loan, including, without
limitation, any Liquidated Loan with respect to which any of the following has occurred as of the
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the related Remittance Period: (a) foreclosure or similar proceedings have been commenced; or
(b) the Servicer or any Subservicer has determined in good faith and in accordance with the
servicing standard set forth in Section 4.01 of the Servicing Addendum that such Loan is in default
or imminent default.
Default LIBOR Margin: As defined in the Pricing Letter.
Deleted Loan: A Loan replaced or to be replaced by one or more Qualified Substitute
Loans.
Delinquent: A Loan is “Delinquent” if any Monthly Payment due thereon is not made by
the close of business on the day such Monthly Payment is required to be paid. A Loan is “30 days
Delinquent” if any Monthly Payment due thereon has not been received by the close of business on
the corresponding day of the month immediately succeeding the month in which such Monthly Payment
was required to be paid or, if there is no such corresponding day (e.g., as when a 30-day month
follows a 31-day month in which a payment was required to be paid on the 31st day of such month),
then on the last day of such immediately succeeding month. The determination of whether a Loan is
“60 days Delinquent,” “90 days Delinquent,” etc., shall be made in like manner.
Delivery: When used with respect to Trust Account Property means:
(a) with respect to bankers’ acceptances, commercial paper, negotiable certificates
of deposit and other obligations that constitute “instruments” within the meaning of Section
9-102(a)(47) of the UCC and are susceptible of physical delivery (except with respect to Trust
Account Property consisting of certificated securities (as defined in Section 8-102(a)(4) of the
UCC)), physical delivery to the Indenture Trustee or its custodian (or the related Securities
Intermediary) endorsed to the Indenture Trustee or its custodian (or the related Securities
Intermediary) or endorsed in blank (and if delivered and endorsed to the Securities Intermediary,
by continuous credit thereof by book-entry to the related Trust Account);
(b) with respect to a certificated security (i) delivery of such certificated
security endorsed to, or registered in the name of, the Indenture Trustee or endorsed in blank to
its custodian or the related Securities Intermediary and the making by such Securities Intermediary
of appropriate entries in its records identifying such certificated securities as credited to the
related Trust Account, or (ii) by delivery thereof to a “clearing corporation” (as defined in
Section 8-102(a)(5) of the UCC) and the making by such clearing corporation of appropriate entries
in its records crediting the securities account of the related Securities Intermediary by the
amount of such certificated security and the making by such Securities Intermediary of appropriate
entries in its records identifying such certificated securities as credited to the related Trust
Account (all of the Trust Account Property described in Subsections (a) and (b), “Physical
Property”); and, in any event, any such Physical Property in registered form shall be in the name
of the Indenture Trustee or its nominee or custodian (or the related Securities Intermediary); and
such additional or alternative procedures as may hereafter become appropriate to effect the
complete transfer of ownership of any such Trust Account Property to the Indenture Trustee or its
nominee or custodian, consistent with changes in applicable law or regulations or the
interpretation thereof;
(c) with respect to any security issued by the U.S. Treasury, Fannie Mae or Freddie
Mac that is a book-entry security held through the Federal Reserve System pursuant to federal
book-entry regulations, the following procedures, all in accordance with applicable law, including
applicable federal
regulations and Articles 8 and 9 of the UCC: the making by a Federal Reserve Bank of an
appropriate entry crediting such Trust Account Property to an account of the related Securities
Intermediary or the securities intermediary that is (x) also a ‘participant” pursuant to applicable
federal regulations and (y) is acting as securities intermediary on behalf of the Securities
Intermediary with respect to such Trust
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Account Property; the making by such Securities Intermediary or securities intermediary of
appropriate entries in its records crediting such book-entry security held through the Federal
Reserve System pursuant to federal book-entry regulations and Articles 8 and 9 of the UCC to the
related Trust Account; and such additional or alternative procedures as may hereafter become
appropriate to effect complete transfer of ownership of any such Trust Account Property to the
Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or
regulations or the interpretation thereof; and
(d) with respect to any item of Trust Account Property that is an uncertificated
security (as defined in Section 8-102(a)(18) of the UCC) and that is not governed by clause (c)
above, registration in the records of the issuer thereof in the name of the related Securities
Intermediary, and the making by such Securities Intermediary of appropriate entries in its records
crediting such uncertificated security to the related Trust Account.
Designated Depository Institution: With respect to an Eligible Account, an institution
whose deposits are insured by the Bank Insurance Fund or the Savings Association Insurance Fund of
the FDIC, the long-term deposits of which shall be rated A or better by S&P or A2 or better by
Moody’s and the short-term deposits of which shall be rated P-1 or better by Moody’s and A-1 or
better by S&P, unless otherwise approved in writing by the Noteholder Agent and which is any of the
following: (A) a federal savings and loan association duly organized, validly existing and in good
standing under the federal banking laws, (B) an institution duly organized, validly existing and in
good standing under the applicable banking laws of any state, (C) a national banking association
duly organized, validly existing and in good standing under the federal banking laws, (D) a
principal subsidiary of a bank holding company or (E) approved in writing by the Noteholder Agent
and, in each case acting or designated by the Servicer as the depository institution for the
Eligible Account; provided, however, that any such institution or association shall have combined
capital, surplus and undivided profits of at least $50,000,000.
Depositor: Option One Loan Warehouse Corporation, a Delaware corporation, and any
successors thereto.
Determination Date: With respect to any Payment Date occurring on the 10th day of a
month, the last calendar day of the month immediately preceding the month of such Payment Date, and
with respect to any other Payment Date, as mutually agreed by the Servicer and the Noteholders.
Disposition: A Securitization, Whole Loan Sale transaction, or other disposition of
Loans.
Disposition Agent: Deutsche Bank Structured Products, Inc. and its successors and
assigns acting at the direction, and as agent, of the Majority Noteholders.
Disposition Participant: As applicable, with respect to a Disposition, any “depositor”
with respect to such Disposition, the Disposition Agent, the Majority Noteholders, the Issuer, the
Servicer, the related trustee and the related custodian, any nationally recognized credit rating
agency, the related underwriters, the related placement agent, the related credit enhancer, the
related whole-loan purchaser, the
related purchaser of securities and/or any other party necessary or, in the good faith belief
of any of the foregoing, desirable to effect a Disposition.
Disposition Proceeds: With respect to a Disposition, (x) the proceeds of the
Disposition remitted to the Trust in respect of the Loans transferred on the date of and with
respect to such Disposition, including without limitation, any cash and Retained Securities created
in any related Securitization less all costs, fees and expenses incurred in connection with such
Disposition, including, without limitation, all amounts deposited into any reserve accounts upon
the closing thereof plus or minus
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(y) the net positive or net negative value of all Hedging Instruments, if any, terminated in
connection with such Disposition minus (z) all other amounts agreed upon in writing by the
Noteholder Agent, the Trust and the Servicer.
Distribution Account: The account established and maintained pursuant to Section
5.01(a)(2) hereof.
Due Date: The day of the month on which the Monthly Payment is due from the Borrower
with respect to a Loan.
Due Diligence Fees: Shall have the meaning provided in Section 11.15 hereof.
Early Payment Default Loan: As defined in the Pricing Letter.
Eligible Account: At any time, a deposit account or securities account which is: (1)
maintained with a Designated Depository Institution; (ii) fully insured by either the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC; (iii) a trust account (which
shall be a “segregated trust account”) maintained with the corporate trust department of a federal
or state chartered depository institution or trust company with trust powers and acting in its
fiduciary capacity for the benefit of the Indenture Trustee and the Issuer, which depository
institution or trust company shall have capital and surplus of not less than $50,000,000; or (iv)
with the prior written consent of the Noteholder Agent, any other deposit account or securities
account.
Eligible Servicer: Option One or any other Person to which the Majority Noteholders
may consent in writing.
Escrow Payments: With respect to any Loan, the amounts constituting ground rents,
taxes, assessments, water rates, sewer rents, municipal charges, fire, hazard, liability and other
insurance premiums, condominium charges, and any other payments required to be escrowed by the
related Borrower with the lender or servicer pursuant to the Mortgage or any other document.
Event of Default: An Event of Default under the Indenture.
Exceptions: The meaning set forth in the Custodial Agreement.
Exceptions Report: The meaning set forth in the Custodial Agreement.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Fannie Mae: The Federal National Mortgage Association and any successor thereto.
Fatal Exception: As defined in the Custodial Agreement.
FDIC: The Federal Deposit Insurance Corporation and any successor thereto.
Fidelity Bond: As described in Section 4.10 of the Servicing Addendum.
Final Put Date: The Put Date following the end of the Revolving Period on which the
Majority Noteholders (or the Market Value Agent on their behalf) exercise the Put Option with
respect to the entire outstanding Note Principal Balance.
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Final Recovery Determination: With respect to any defaulted Loan or any
Foreclosure Property, a determination made by the Servicer that all Mortgage Insurance Proceeds,
Liquidation Proceeds and other payments or recoveries which the Servicer, in its reasonable good
faith judgment, expects to be finally recoverable in respect thereof have been so recovered. The
Servicer shall maintain records, prepared by a servicing officer of the Servicer, of each Final
Recovery Determination.
Financial Covenants: As defined in Section 7.02 hereof.
First Lien Loan: A Loan secured by the lien on the related Mortgaged Property, subject
to no prior liens on such Mortgaged Property.
Foreclosed Loan: As of any Determination Date, any Loan that as of the end of the
preceding Remittance Period has been discharged as a result of (i) the completion of foreclosure or
comparable proceedings by the Servicer, on behalf of the Issuer; (ii) the acceptance of the deed or
other evidence of title to the related Mortgaged Property in lieu of foreclosure or other
comparable proceeding; or (iii) the acquisition of title to the related Mortgaged Property by
operation of law.
Foreclosure Property: Any real property securing a Foreclosed Loan that has been
acquired by the Servicer on behalf of the Issuer through foreclosure, deed in lieu of foreclosure
or similar proceedings in respect of the related Loan.
40/30 Loan: A Loan with a 40 year amortization period that becomes due and payable in
full at the end of the 30th year.
Freddie Mac: The Federal Home Loan Mortgage Corporation and any successor thereto.
GAAP: Generally Accepted Accounting Principles as in effect in the United States.
Gross Margin: With respect to each ARM, the fixed percentage spread to the Index, set
forth in the related Promissory Note.
Hedge Funding Requirement: With respect to any day, all amounts required to be paid or
delivered by the Issuer under any Hedging Instrument, whether in respect of payments thereunder or
in order to meet margin, collateral or other requirements thereof. Such amounts shall be calculated
by the Market Value Agent and the Indenture Trustee shall be notified of such amount by the Market
Value Agent.
Hedge Value: With respect to any Business Day and a specific Hedging Instrument, the
positive amount, if any, that is equal to the amount that would be paid to the Issuer in
consideration of an agreement between the Issuer and an unaffiliated third party, that would have
the effect of preserving for the Issuer the net economic equivalent, as of such Business Day, of
all payment and delivery requirements payable to and by the Issuer under such Hedging Instrument
until the termination thereof, as determined by the Market Value Agent in accordance with Section
6.03 hereof.
Hedging Counterparty: A Person (i) (A) the long-term and commercial paper or
short-term deposit ratings of which are acceptable to the Majority Noteholders and (B) which shall
agree in writing that, in the event that any of its long-term or commercial paper or short-term
deposit ratings cease to be at or above the levels deemed acceptable by the Majority Noteholders,
it shall secure its obligations in accordance with the request of the Majority Noteholders, (ii)
that has entered into a Hedging Instrument and (iii) that is acceptable to the Majority
Noteholders.
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Hedging Instrument: Any interest rate cap agreement, interest rate floor
agreement, interest rate swap agreement or other interest rate hedging agreement that may be
entered into by the Issuer with a Hedging Counterparty, and which requires the Hedging Counterparty
to deposit all amounts payable thereby directly to the Collection Account. Each Hedging Instrument
shall meet the requirements set forth in Article VII hereof with respect thereto.
High LTV Loans: First Lien Loans with an LTV and Second Lien Loans with a CLTV (that
are not Piggy Backed Loans) greater than or equal to 90% and less than or equal to 100%.
Indenture: The Indenture dated as of December 30, 2005, between the Issuer and the
Indenture Trustee, as the same may be further amended or supplemented from time to time.
Indenture Trustee: Wells Fargo Bank, N..A., a national banking association, as
Indenture Trustee under the Indenture, or any successor indenture trustee under the Indenture.
Indenture Trustee Fee: An annual fee of $5,000 payable by the Servicer in accordance
with a separate fee agreement between the Indenture Trustee and the Servicer and Section 5.01
hereof.
Independent: When used with respect to any specified Person, such Person (i) is in
fact independent of the Loan Originator, the Servicer, the Depositor or any of their respective
Affiliates, (ii) does not have any direct financial interest in, or any material indirect financial
interest in, the Loan Originator, the Servicer, the Depositor or any of their respective Affiliates
and (iii) is not connected with the Loan Originator, the Depositor, the Servicer or any of their
respective Affiliates, as an officer, employee, promoter, underwriter, trustee, partner, director
or Person performing similar functions; provided, however, that a Person shall not fail to be
Independent of the Loan Originator, the Depositor, the Servicer or any of their respective
Affiliates merely because such Person is the beneficial owner of 1% or less of any class of
securities issued by the Loan Originator, the Depositor, the Servicer or any of their respective
Affiliates, as the case may be.
Index: With respect to each ARM, the index set forth in the related Promissory Note
for the purpose of calculating the Loan Interest Rate thereon.
Interest Carry-Forward Amount: With respect to any Payment Date, the excess, if any,
of (A) the Interest Payment Amount for such Payment Date plus the unpaid portion of the Interest
Payment
Amount for the prior Payment Date over (B) the amount in respect of interest that is actually
paid from the Distribution Account on such Payment Date in respect of the interest for such Payment
Date.
Interest Only Mortgage Loan: A Mortgage Loan for which an interest-only payment
feature is allowed during the period prior to the first Adjustment Date.
Interest Payment Amount: With respect to any Payment Date, the sum of the Daily
Interest Accrual Amounts for all days in the related Accrual Period.
LIBOR Determination Date: With respect to each Accrual Period, each day during such
Accrual Period.
LIBOR Margin: As defined in the Pricing Letter.
Lien: With respect to any asset, (a) any mortgage, lien, pledge, charge, security
interest, hypothecation, option or encumbrance of any kind in respect of such asset or (b) the
interest of a vendor or lessor under any conditional sale agreement, financing lease or other title
retention agreement relating
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to such asset. When used with reference to the Indenture, all of the rights assigned to the
Indenture Trustee by virtue of the Granting Clause of the Indenture.
Lifetime Cap: The provision in the Promissory Note for each ARM which limits the
maximum Loan Interest Rate over the life of such ARM.
Lifetime Floor: The provision in the Promissory Note for each ARM which limits the
minimum Loan Interest Rate over the life of such ARM.
Liquidated Loan: As defined in Section 4.03(c) of the Servicing Addendum.
Liquidated Loan Losses: With respect to any Determination Date, the difference between
(i) the aggregate Principal Balances as of such date of all Loans that became Liquidated Loans and
(ii) all Liquidation Proceeds allocable to principal received on or prior to such date.
Liquidation Proceeds: With respect to a Liquidated Loan, any cash amounts received in
connection with the liquidation of such Liquidated Loan, whether through trustee’s sale,
foreclosure sale or other disposition, any cash amounts received in connection with the management
of the Mortgaged Property from Defaulted Loans, any proceeds from Primary Insurance Policies and
any other amounts required to be deposited in the Collection Account pursuant to Section 5.01(b)
hereof, in each case other than Mortgage Insurance Proceeds and Released Mortgaged Property
Proceeds. Liquidation Proceeds shall also include any awards or settlements in respect of the
related Mortgage Property, whether permanent or temporary, partial or entire, by exercise of the
power of eminent domain or condemnation.
Loan: Any loan sold to the Trust hereunder and pledged to the Indenture Trustee, which
loan includes, without limitation, (i) a Promissory Note or Lost Note Affidavit and related
Mortgage and (ii) all right, title and interest of the Loan Originator in and to the Mortgaged
Property covered by such Mortgage. The term Loan shall be deemed to include the related Promissory
Note or Lost Note Affidavit, related Mortgage, all other Loan Documents and related Foreclosure
Property, if any.
Loan Documents: With respect to a Loan, the documents comprising the Loan File for
such Loan.
Loan File: With respect to each Loan, the Custodial Loan File and the Servicer’s Loan
File.
Loan Interest Rate: With respect to each Loan, the annual rate of interest borne by
the related Promissory Note, as shown on the Loan Schedule, and, in the case of an ARM, as the same
may be periodically adjusted in accordance with the terms of such Loan.
Loan Originator: Option One and its permitted successors and assigns.
Loan Originator Put: The mandatory repurchase by the Loan Originator, at the option of
the Majority Noteholders, of a Loan pursuant to Section 3.08(a) hereof.
Loan Pool: As of any date of determination, the pool of all Loans conveyed to the
Issuer pursuant to this Agreement on all Transfer Dates up to and including such date of
determination, which Loans have not been released from the Lien of the Indenture pursuant to the
terms of the Basic Documents, together with the rights and obligations of a holder thereof, and the
payments thereon and proceeds therefrom received on and after the applicable Transfer Cut-off Date,
as identified from time to time on the Loan Schedule.
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Loan Purchase and Contribution Agreement: The Fourth Amended and Restated Loan
Purchase and Contribution Agreement, between Option One, as seller and the Depositor, as purchaser,
dated as of September 1, 2005, as heretofore supplemented, amended and restated, and as it may
hereafter be further supplemented, amended and restated.
Loan Schedule: The schedule of Loans conveyed to the Issuer on the Closing Date and on
each Transfer Date and delivered to the Noteholder Agent and the Custodian in the form of a
computer-readable transmission specifying the information set forth in Exhibit E hereto and
with respect to Wet Funded Loans, Exhibit C to the Custodial Agreement.
Loan-to-Value Ratio or LTV: With respect to any First Lien Loan, the ratio of the
original outstanding principal amount of such Loan to the Appraised Value of the Mortgaged Property
at origination.
Lost Note Affidavit: With respect to any Loan as to which the original Promissory Note
has been permanently lost or destroyed and has not been replaced, an affidavit from the Loan
Originator certifying that the original Promissory Note has been lost, misplaced or destroyed
(together with a copy of the related Promissory Note and indemnifying the Issuer against any loss,
cost or liability resulting from the failure to deliver the original Promissory Note) in the form
of Exhibit L attached to the Custodial Agreement.
LPA Assignment: The assignment of Loans from Option One to the Depositor under the
Loan Purchase and Contribution Agreement.
Majority Certificateholders: As defined in the Trust Agreement.
Majority Noteholders: The holder or holders of in excess of 50% of the Note Principal
Balance. In the event of the release of the Lien of the Indenture in accordance with the terms
thereof, the Majority Noteholders shall mean the Majority Certificateholders.
Market Value: The market value of a Loan as of any Business Day as determined by the
Market Value Agent in accordance with Section 6.03 hereof.
Market Value Agent: DB Structured Products, Inc. or an Affiliate thereof designated by
DB Structured Products, Inc. in writing to the parties hereto and, in either case, its successors
in interest.
Master Disposition Confirmation Agreement: The Fourth Amended and Restated Master
Disposition Confirmation Agreement, dated as of June 1, 2005, by and among Option One, the
Depositor, the Delaware statutory trusts listed on Schedule I thereto and each of the Lenders
listed on Schedule II thereto, as amended and supplemented from time to time.
Maturity Date: With respect to the Notes, as set forth in the Indenture or such later
date as may be agreed in writing by the Majority Noteholders.
Maximum Committed Note Principal Balance: As defined in the Pricing Letter.
Maximum Note Principal Balance: As defined in the Pricing Letter.
Monthly Advance: The aggregate of the advances made by the Servicer on any Remittance
Date pursuant to Section 4.14 of the Servicing Addendum.
11
Monthly Payment: The scheduled monthly payment of principal and/or interest
required to be made by a Borrower on the related Loan, as set forth in the related Promissory Note.
Monthly Remittance Amount: With respect to each Remittance Date, the sum, without
duplication, of (i) the aggregate payments on the Loans collected by the Servicer pursuant to
Section 5.01(b)(i) during the immediately preceding Remittance Period and (ii) the aggregate of
amounts deposited into the Collection Account pursuant to Section 5.01(b)(ii) through
5.01(b)(x) during the immediately preceding Remittance Period.
Moody’s: Moody’s Investors Service, Inc., or any successor thereto.
Mortgage: With respect to any Loan, the mortgage, deed of trust or other instrument
securing the related Promissory Note, which creates a first or second lien on the fee in real
property and/or a first or second lien on the leasehold estate in real property securing the
Promissory Note and the assignment of rents and leases related thereto.
Mortgage Insurance Policies: With respect to any Mortgaged Property or Loan, the
insurance policies required pursuant to Section 4.08 of the Servicing Addendum.
Mortgage Insurance Proceeds: With respect to any Mortgaged Property, all amounts
collected in respect of Mortgage Insurance Policies and not required either pursuant to applicable
law or the related Loan Documents to be applied to the restoration of the related Mortgaged
Property or paid to the related Borrower.
Mortgaged Property: With respect to a Loan, the related Borrower’s fee and/or
leasehold interest in the real property (and/or all improvements, buildings, fixtures, building
equipment and personal property thereon (to the extent applicable) and all additions, alterations
and replacements made at any time with respect to the foregoing) and all other collateral securing
repayment of the debt evidenced by the related Promissory Note.
Net Liquidation Proceeds: With respect to any Payment Date, Liquidation Proceeds
received during the prior Remittance Period, net of any reimbursements to the Servicer made from
such amounts for any unreimbursed Servicing Compensation and Servicing Advances (including
Nonrecoverable Servicing Advances) made and any other fees and expenses paid in connection with the
foreclosure, inspection, conservation and liquidation of the related Liquidated Loans or
Foreclosure Properties pursuant to Section 4.03 of the Servicing Addendum.
Net Loan Losses: With respect to any Defaulted Loan that is subject to a modification
pursuant to Section 4.01 of the Servicing Addendum, an amount equal to the portion of the Principal
Balance, if any, released in connection with such modification.
Net Worth: With respect to any Person, the excess of total assets of such Person, over
total liabilities of such Person, determined in accordance with GAAP.
Non-Fatal Exception: As defined in Section 2.05(b)(i) hereof.
Nonrecoverable Monthly Advance: Any Monthly Advance previously made or proposed to be
made with respect to a Loan or Foreclosure Property that, in the good faith business judgment of
the Servicer, as evidenced by an Officer’s Certificate of a Servicing Officer delivered to the
Noteholder Agent, will not, or, in the case of a proposed Monthly Advance, would not be, ultimately
recoverable
12
from the related late payments, Mortgage Insurance Proceeds, Liquidation Proceeds or
condemnation proceeds on such Loan or Foreclosure Property as provided herein.
Nonrecoverable Servicing Advance: With respect to any Loan or any Foreclosure
Property, (a) any Servicing Advance previously made and not reimbursed from late collections,
condemnation proceeds, Liquidation Proceeds, Mortgage Insurance Proceeds or the Released Mortgaged
Property Proceeds on the related Loan or Foreclosure Property or (b) a Servicing Advance proposed
to be made in respect of a Loan or Foreclosure Property either of which, in the good faith business
judgment of the Servicer, as evidenced by an Officer’s Certificate of a Servicing Officer delivered
to the Noteholder Agent, would not be ultimately recoverable.
Nonutilization Fee: As defined in the Pricing Letter.
Note: As defined in the Indenture.
Noteholder: As defined in the Indenture.
Noteholder Agent: DB Structured Products, Inc. and its successors and assigns acting
at the direction, and as agent, of the Majority Noteholders.
Note Interest Rate: As defined in the Pricing Letter.
Note Principal Balance: With respect to the Notes, as of any date of determination (a)
the sum of the Additional Note Principal Balances purchased on or prior to such date pursuant to
the Note Purchase Agreement less (b) all amounts previously distributed in respect of principal of
the Notes on or prior to such day.
Note Purchase Agreement: The Note Purchase Agreement among the Purchasers, the
Noteholder Agent, the Issuer and the Depositor, dated as of December 30, 2005 and any amendments
thereto.
Note Redemption Amount: As of any Determination Date, an amount without duplication
equal to the sum of (i) the then outstanding Note Principal Balance of the Notes, plus the Interest
Payment Amount for the related Payment Date, (ii) any Trust Fees and Expenses due and unpaid on the
related Payment Date, (iii) any Servicing Advance Reimbursement Amount as of such Determination
Date, and (iv) all amounts due to Hedging Counterparties in respect of the termination of all
related Hedging Instruments.
Officer’s Certificate: A certificate signed by a Responsible Officer of the Depositor,
the Loan Originator, the Servicer or the Issuer, in each case, as required by this Agreement.
One-Month LIBOR: With respect to each Accrual Period, the rate determined by the
Noteholder Agent on the related LIBOR Determination Date on the basis of the offered rate for
one-month U.S. dollar deposits, as such rate appears on Telerate Page 3750 as of 11:00 a.m. (London
time) on such LIBOR Determination Date; provided that if such rate does not appear on Telerate Page
3750, the rate for such date will be determined on the basis of the offered rates of the Reference
Banks for one-month U.S. dollar deposits, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. In such event, the Noteholder Agent will request the principal London office of
each of the Reference Banks to provide a quotation of its rate. If on such LIBOR Determination
Date, two or more Reference Banks provide such offered quotations, One-Month LIBOR for the related
Accrual Period shall be the arithmetic mean of all such offered quotations (rounded to the nearest
whole multiple of 1/16%). If on such LIBOR
13
Determination Date, fewer than two Reference Banks provide such offered quotations, One-Month
LIBOR for the related Accrual Period shall be the higher of (i) LIBOR as determined on the previous
LIBOR Determination Date and (ii) the Reserve Interest Rate. Notwithstanding the foregoing, if,
under the priorities described above, One-Month LIBOR for a LIBOR Determination Date would be based
on One-Month LIBOR for the previous LIBOR Determination Date for the third consecutive LIBOR
Determination Date, the Noteholder Agent shall select an alternative comparable index (over which
the Noteholder Agent has no control), used for determining one-month Eurodollar lending rates that
is calculated and published (or otherwise made available) by an independent party.
Opinion of Counsel: A written opinion of counsel who may be employed by the Servicer,
the Depositor, the Loan Originator or any of their respective Affiliates.
Option One: Option One Mortgage Corporation, a California corporation.
Overcollateralization Shortfall: With respect to any Business Day, a positive amount,
if any, equal to (a) the Note Principal Balance on such Business Day minus (b) the aggregate
Collateral Value of all Loans in the Loan Pool as of such Business Day; provided, however, that on
(A) the termination of the Revolving Period, (B) the occurrence of a Rapid Amortization Trigger,
(C) the Payment Date on which the Trust is to be terminated pursuant to Section 10.02
hereof or (D) the Final Put Date, the
Overcollateralization Shortfall shall be equal to the Note Principal Balance. Notwithstanding
anything to the contrary herein, in no event shall the Overcollateralization Shortfall, with
respect to any Business Day, exceed the Note Principal Balance as of such date. If, as of such
Business Day, no Rapid Amortization Trigger or Default under this Agreement or the Indenture shall
be in effect, the Overcollateralization Shortfall shall be reduced (but in no event to an amount
below zero) by all or any portion of the aggregate Hedge Value (if any) as of such Payment Date as
the Majority Noteholders may, in their sole discretion, designate in writing.
Owner Trustee: Wilmington Trust Company, a Delaware banking corporation, not in its
individual capacity but solely as Owner Trustee, and any successor owner trustee under the Trust
Agreement.
Owner Trustee Fee: The annual fee of $4,400 payable in equal monthly installments to
the Servicer pursuant to Section 5.01(c)(3)(i), and the Servicer shall, in turn, pay such amount
annually to the Owner Trustee on the anniversary of the Closing Date occurring each year during the
term of this Agreement.
Paying Agent: As defined in the Indenture.
Payment Date: Each of, (i) the 10th day of each calendar month commencing
on the first such 10th day to occur after the first Transfer Date, or if any such day is
not a Business Day, the first Business Day immediately following such day, (ii) any day a Loan is
sold pursuant to the terms hereof, (iii) a Put Date as specified by the Majority Noteholders
pursuant to Section 10.05 of the Indenture and (iv) an additional Payment Date pursuant to Section
5.01(c)(4)(i) and 5.01(c)(4)(iii). From time to time, the Majority Noteholders and the Issuer may
agree, upon written notice to the Owner Trustee and the Indenture Trustee, to additional Payment
Dates in accordance with Section 5.01(c)(4)(ii).
Payment Statement: As defined in Section 6.01(b) hereof.
Percentage Interest: As defined in the Trust Agreement.
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Periodic Cap: With respect to each ARM Loan and any Rate Change Date therefor,
the annual percentage set forth in the related Promissory Note, which is the maximum annual
percentage by which the Loan Interest Rate for such Loan may increase or decrease (subject to the
Lifetime Cap or the Lifetime Floor) on such Rate Change Date from the Loan Interest Rate in effect
immediately prior to such Rate Change Date.
Permitted Investments: Each of the following:
(a) Direct general obligations of the United States or the obligations of any agency
or instrumentality of the United States fully and unconditionally guaranteed, the timely payment or
the guarantee of which constitutes a full faith and credit obligation of the United States.
(b) Federal Housing Administration debentures rated Aa2 or higher by Moody’s and AA
or better by S&P.
(c) Freddie Mac senior debt obligations rated Aa2 or higher by Moody’s and AA or
better by S&P.
(d) Federal Home Loan Banks’ consolidated senior debt obligations rated Aa2 or
higher by Moody’s and AA or better by S&P.
(e) Fannie Mae senior debt obligations rated Aa2 or higher by Moody’s.
(f) Federal funds, certificates or deposit, time and demand deposits, and bankers’
acceptances (having original maturities of not more than 365 days) of any domestic bank, the
short-term debt obligations of which have been rated A-1 or better by S&P and P-1 or better by
Moody’s.
(g) Investment agreements approved by the Noteholder Agent provided:
(1) The agreement is with a bank or insurance company which has an unsecured,
uninsured and unguaranteed obligation (or claims-paying ability) rated Aa2 or better by Moody’s and
AA or better by S&P, and
(2) Monies invested thereunder may be withdrawn without any penalty, premium or
charge upon not more than one day’s notice (provided such notice may be amended or canceled at any
time prior to the withdrawal date), and
(3) The agreement is not subordinated to any other obligations of such insurance
company or bank, and
(4) The same guaranteed interest rate will be paid on any future deposits made
pursuant to such agreement, and
(5) The Indenture Trustee and the Noteholder Agent receive an opinion of counsel
that such agreement is an enforceable obligation of such insurance company or bank.
(h) Commercial paper (having original maturities of not more than 365 days) rated
A-1 or better by S&P and P-1 or better by Moody’s.
(i) Investments in money market funds rated AAAM or AAAM-G by S&P and Aaa or P-1 by
Moody’s.
15
(j) Investments approved in writing by the Noteholder Agent;
provided, that no instrument described above is permitted to evidence either the right to receive
(a) only interest with respect to obligations underlying such instrument or (b) both principal and
interest payments derived from obligations underlying such instrument and the interest and
principal payments with respect to such instrument provide a yield to maturity at par greater than
120% of the yield to maturity at par of the underlying obligations; and provided, further, that no
instrument described above may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to stated maturity; and provided,
further, that, with respect to any instrument described above, such
instrument qualifies as a “permitted investment” within the meaning of Section 860G(a)(5) of the
Code and the regulations thereunder.
Person: Any individual, corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust, national banking association, unincorporated
organization or government or any agency or political subdivision thereof.
Physical Property: As defined in clause (b) of the definition of “Delivery” above.
Piggy-Backed Loan: A combined First Lien Loan, with an LTV less than or equal to 80%,
and Second Lien Loan, with a CLTV less than or equal to 100%, that satisfy the underwriting
criteria set forth in Exhibit D hereto and have a minimum FICO score of 580, with respect to a Loan
with full documentation, or 620, with respect to a Loan with stated income documentation
Pool Principal Balance: With respect to any Determination Date, the aggregate
Principal Balances of the Loans as of such Determination Date.
Prepaid Installment: With respect to any Loan, any installment of principal thereof
and interest thereon received prior to the scheduled Due Date for such installment, intended by the
Borrower as an early payment thereof and not as a Prepayment with respect to such Loan.
Prepayment: Any payment of principal of a Loan which is received by the Servicer in
advance of the scheduled due date for the payment of such principal (other than the principal
portion of any Prepaid Installment), and the proceeds of any Mortgage Insurance Policy which are to
be applied as a payment of principal on the related Loan shall be deemed to be Prepayments for all
purposes of this Agreement.
Preservation Expenses: Expenditures made by the Servicer in connection with a
foreclosed Loan prior to the liquidation thereof, including, without limitation, expenditures for
real estate property taxes, hazard insurance premiums, property restoration or preservation.
Pricing Letter: The Pricing Letter among the Issuer, the Depositor, Option One and the
Indenture Trustee, dated December 30, 2005 and any amendments thereto.
Primary Insurance Policy: A policy of primary mortgage guaranty insurance issued by a
Qualified Insurer pursuant to Section 4.06 of the Servicing Addendum.
Principal Balance: With respect to any Loan or related Foreclosure Property, (i) at
the Transfer Cut-off Date, the Transfer Cut-off Date Principal Balance and (ii) with respect to any
other date of determination, the outstanding unpaid principal balance of the Loan as of the end of
the preceding Remittance Period (after giving effect to all payments received thereon and the
allocation of any Net Loan
16
Losses with respect thereto for a Defaulted Loan prior to the end of such Remittance Period);
provided, however, that any Liquidated Loan shall be deemed to have a Principal Balance of zero.
Promissory Note: With respect to a Loan, the original executed promissory note or
other evidence of the indebtedness of the related Borrower or Borrowers.
Purchasers: The Committed Purchaser and the Conduit Purchasers and their permitted
successors and assigns.
Put/Call Loan: Any (i) Loan that has become 30 or more days (but less than 60 days)
Delinquent, (ii) Loan that has become 60 or more days (but less than 90 days) Delinquent, (iii)
Loan that has become 90 or more days Delinquent, (iv) Loan that is a Defaulted Loan, (v) Loan that
has been in default for a period of 30 days or more (other than a Loan referred to in clause (i),
(ii), (iii) or (iv) hereof), (vi) Loan that does not meet criteria established by independent
rating agencies or surety agency conditions for Dispositions which criteria have been established
at the related Transfer Date and may be modified only to match changed criteria of independent
rating agencies or surety agents, or (vii) Loan that is inconsistent with the intended tax status
of a Securitization.
Put Date: Any date on which all or a portion of the Notes are to be purchased by the
Issuer as a result of the exercise of the Put Option.
Put Option: The right of the Majority Noteholders to require the Issuer to repurchase
all or a portion of the Notes in accordance with Section 10.04 of the Indenture.
QSPE Affiliate: Any of Option One Owner Trust 2001-1 A, Option One Owner Trust 2001-1
B, Option One Owner Trust 2002-3, Option One Owner Trust 2003-4, Option One Owner Trust 2003-5,
Option One Owner Trust 2005-6, Option One Owner Trust 2005-7, Option One Owner Trust 2005-8, or any
other Affiliate which is a “qualified special purpose entity” in accordance with Financial
Accounting Standards Board’s Statement No. 140 or 125.
Qualified Insurer: An insurance company duly qualified as such under the laws of the
states in which the Mortgaged Property is located, duly authorized and licensed in such states to
transact the applicable insurance business and to write the insurance provided and that meets the
requirements of Fannie Mae and Freddie Mac.
Qualified Substitute Loan: A Loan or Loans substituted for a Deleted Loan pursuant to
Section 3.06 hereof, which (i) has or have been approved in writing by the Majority Noteholders and
(ii) complies or comply as of the date of substitution with each representation and warranty set
forth in Exhibit F and is or are not 30 or more days Delinquent as of the date of substitution for
such Deleted Loan or Loans.
Rapid Amortization Trigger: Shall exist as of any Determination Date, if the aggregate
Principal Balance of all Loans that are Delinquent greater than or equal to 30 days (including
Defaulted Loans and Foreclosed Loans) as of such Determination Date is greater than or equal to 15%
of the Pool Principal Balance as of such Determination Date; provided, however, that a Rapid
Amortization Trigger shall not occur if such percentage is reduced to less than 15% within one (1)
Business Day as of such Determination Date as a result of the exercise of a Servicer Call. A Rapid
Amortization Trigger shall continue to exist until it is Deemed Cured.
Rate Change Date: The date on which the Loan Interest Rate of each ARM is subject to
adjustment in accordance with the related Promissory Note.
17
Rating Agencies: S&P and Moody’s or such other nationally recognized credit
rating agencies as may from time to time be designated in writing by the Majority Noteholders in
their sole discretion.
Record Date: With respect to each Payment Date, the close of business of the
immediately preceding Business Day.
Reference Banks: Deutsche Bank AG, Barclay’s Bank PLC, The Tokyo Mitsubishi Bank and
National Westminster Bank PLC and their successors in interest; provided, however, that if the
Noteholder Agent determines that any of the foregoing banks are not suitable to serve as a
Reference Bank, then any leading banks selected by the Noteholder Agent with the approval of the
Issuer, which approval shall not be unreasonably withheld, which are engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an established place of
business in London and (ii) which have been designated as such by the Noteholder Agent with the
approval of the Issuer, which approval shall not be unreasonably withheld.
Refinanced Loan: A Loan the proceeds of which were not used to purchase the related
Mortgaged Property.
Released Mortgaged Property Proceeds: With respect to any Loan, proceeds received by
the Servicer in connection with (i) a taking of an entire Mortgaged Property by exercise of the
power of eminent domain or condemnation or (ii) any release of part of the Mortgaged Property from
the lien of the related Mortgage, whether by partial condemnation, sale or otherwise; which
proceeds in either case are not released to the Borrower in accordance with applicable law and/or
Accepted Servicing Practices.
Remittance Date: The Business Day immediately preceding each Payment Date.
Remittance Period: With respect to any Payment Date, the period commencing immediately
following the Determination Date for the preceding Payment Date (or, in the case of the initial
Payment Date, commencing immediately following the initial Transfer Cut-off Date) and ending on and
including the related Determination Date.
Repurchase Price: With respect to a Loan the sum of (i), the Principal Balance thereof
as of the date of purchase or repurchase, plus (ii) all accrued and unpaid interest on such Loan to
the date of purchase or repurchase computed at the applicable Loan Interest Rate, plus (iii) the
amount of any unreimbursed Servicing Advances made by the Servicer with respect to such Loan (after
deducting therefrom any amounts received in respect of such purchased or repurchased Loan and being
held in the Collection Account for future distribution to the extent such amounts represent
recoveries of principal not yet applied to reduce the related Principal Balance or interest (net of
the Servicing Fee) for the period from and after the date of repurchase). The Repurchase Price
shall be (i) increased by the net negative value or (ii) decreased by the net positive value of all
Hedging Instruments (if any) that are terminated with respect to the purchase of such Loan. To the
extent the Servicer does not reimburse itself for amounts, if any, in respect of the Servicing
Advance Reimbursement Amount pursuant to Section 5.01(c)(1) hereof, with respect to such Loan, the
Repurchase Price shall be reduced by such amounts.
Reserve Interest Rate: With respect to any LIBOR Determination Date, the rate per
annum that the Noteholder Agent determines to be either (i) the arithmetic mean (rounded to the
nearest whole multiple of 1/16%) of the one-month U.S. dollar lending rates which New York City
banks selected by the Noteholder Agent are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market or (ii) in the event that
the Noteholder Agent can determine no such arithmetic mean, the lowest one-month U.S. dollar
lending rate which New
18
York City banks selected by the Noteholder Agent are quoting on such LIBOR Determination Date
to leading European banks.
Responsible Officer: When used with respect to the Indenture Trustee or Custodian, any
officer within the corporate trust office of such Person, including any Vice President, Assistant
Vice President, Secretary, Assistant Secretary or any other officer of such Person customarily
performing functions similar to those performed by any of the above designated officers and also,
with respect to a particular matter, any other officer to whom such matter is referred because of
such officer’s knowledge of and familiarity with the particular subject. When used with respect to
the Issuer, any officer of the Owner Trustee who is authorized to act for the Owner Trustee in
matters relating to the Issuer and who is identified on the list of Authorized Officers delivered
by the Owner Trustee to the Indenture Trustee on the date hereof (as such list may be modified or
supplemented from time to time thereafter) and, so long as the Administration Agreement is in
effect, any Vice President or more senior officer of the Administrator who is authorized to act for
the Administrator in matters relating to the Issuer and to be acted upon by the Administrator
pursuant to the Administration Agreement and who is identified on the list of Responsible Officers
delivered by the Administrator to the Owner Trustee on the date hereof (as such list may be
modified or supplemented from time to time thereafter). When used with respect to the Depositor,
the Loan Originator or the Servicer, the President, any Vice President, or the Treasurer.
Retained Security or Retained Securities: With respect to a Securitization,
any subordinated securities issued or expected to be issued, or excess collateral value retained or
expected to be retained, in connection therewith to the extent the Depositor, the Loan Originator
or an Affiliate thereof retains, instead of sells, such securities.
Retained Securities Value: With respect to any Business Day and a Retained Security,
the market value thereof as determined by the Market Value Agent in accordance with Section 6.03(d)
hereof.
Revolving Period: With respect to the Notes, the period commencing on the Closing Date
and ending on the earlier of (i) the Maturity Date and (ii) the date on which the Revolving Period
is terminated pursuant to Section 2.07.
Sales Price: For any Transfer Date, the sum of the Collateral Values with respect to
each Loan conveyed on such Transfer Date as of such Transfer Date.
S&SA Assignment: An assignment, in the form of Exhibit C hereto, of Loans and
other property from the Depositor to the Issuer pursuant to this Agreement.
Second Lien Loan: A Loan secured by the lien on the Mortgaged Property, subject to one
Senior Lien on such Mortgaged Property.
Securities: The Notes and the Trust Certificates.
Securities Intermediary: A “securities intermediary” as defined in Section
8-102(a)(14) of the UCC that is holding a Trust Account for the Indenture Trustee as the sole
“entitlement holder” as defined in Section 8-102(a)(7) of the UCC.
Securitization: A sale or transfer of Loans by the Issuer at the direction of the
Majority Noteholders to any other Person in order to effect one or a series of structured-finance
securitization transactions, including but not limited to transactions involving the issuance of
securities which may be
19
treated for federal income tax purposes as indebtedness of Option One or one or more of its
wholly-owned subsidiaries.
Securityholder: Any Noteholder or Certificateholder.
Senior Lien: With respect to any Second Lien Loan, the mortgage loan having a senior
priority lien on the related Mortgaged Property.
Servicer: Option One, in its capacity as the servicer hereunder, or any successor
appointed as herein provided.
Servicer Call: The optional purchase by the Servicer of a Loan pursuant to Section
3.08(b) hereof.
Servicer Event of Default: As described in Section 9.01 hereof.
Servicer’s Fiscal Year: May 1st of each year through April 30th of the following year.
Servicer’s Loan File: With respect to each Loan, the file held by the Servicer,
consisting of all documents (or electronic images thereof) relating to such Loan, including,
without limitation, copies of all of the Loan Documents included in the related Custodial Loan
File.
Servicer’s Remittance Report: A report prepared and computed by the Servicer in
substantially the form of Exhibit B attached hereto.
Servicing Addendum: The terms and provisions set forth in Exhibit G attached
hereto relating to the administration and servicing of the Loans.
Servicing Advance Reimbursement Amount: With respect to any Determination Date, the
amount of any Servicing Advances that have not been reimbursed as of such date, including
Nonrecoverable Servicing Advances.
Servicing Advances: As defined in Section 4.14(b) of the Servicing Addendum.
Servicing Compensation: The Servicing Fee and other amounts to which the Servicer is
entitled pursuant to Section 4.15 of the Servicing Addendum.
Servicing Fee: As to each Loan (including any Loan that has been foreclosed and for
which the related Mortgaged Property has become a Foreclosure Property, but excluding any
Liquidated Loan), the fee payable monthly to the Servicer, which shall be the product of 0.50% (50
basis points), or such other lower amount as shall be mutually agreed to in writing by the Majority
Noteholders and the Servicer, and the Principal Balance of such Loan as of the beginning of the
related Remittance Period, divided by 12. The Servicing Fee shall only be payable with respect to a
Loan to the extent interest is collected on such Loan.
Servicing Officer: Any officer of the Servicer or Subservicer involved in, or
responsible for, the administration and servicing of the Loans whose name and specimen signature
appears on a list of servicing officers annexed to an Officer’s Certificate furnished by the
Servicer or the Subservicer, respectively, on the date hereof to the Issuer and the Indenture
Trustee, on behalf of the Noteholders, as such list may from time to time be amended.
20
S&P: Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies,
Inc.
Subservicer: Any Person with which the Servicer has entered into a Subservicing
Agreement and which is an Eligible Servicer and satisfies any requirements set forth in Section
4.22 of the Servicing Addendum in respect of the qualifications of a Subservicer.
Subservicing Account: An account established by a Subservicer pursuant to a
Subservicing Agreement, which account must be an Eligible Account.
Subservicing Agreement: Any agreement between the Servicer and any Subservicer
relating to subservicing and/or administration of any or all Loans as provided in Section 4.22 in
the Servicing Addendum.
Subsidiary: With respect to any Person, any corporation, partnership or other entity
of which at least a majority of the securities or other ownership interests having by the terms
thereof ordinary voting power to elect a majority of the board of directors or other persons
performing similar functions of such corporation, partnership or other entity (irrespective of
whether or not at the time securities or other ownership interests of any other class or classes of
such corporation, partnership or other entity shall have or might have voting power by reason of
the happening of any contingency) is at the time directly or indirectly owned or controlled by such
Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of
such Person.
Substitution Adjustment: With respect to Loans, as to any date on which a substitution
occurs pursuant to Section 2.05 or Section 3.06 hereof, the amount, if any, by
which (a) the aggregate principal balance of any Qualified Substitute Loans (after application of
principal payments received on or before the related Transfer Cut-off Date) is less than (b) the
aggregate of the Principal Balances of the related Deleted Loans as of the first day of the month
in which such substitution occurs.
Tangible Net Worth: With respect to any Person, as of any date of determination, the
consolidated Net Worth of such Person and its Subsidiaries, less (i) the consolidated net book
value of all assets of such Person and its Subsidiaries (to the extent reflected as an asset in the
balance sheet of such Person or any Subsidiary at such date) which will be treated as intangibles
under GAAP, including, without limitation, such items as deferred financing expenses, net leasehold
improvements, goodwill, trademarks, trade names, service marks, copyrights, patents, licenses and
unamortized debt discount and expense; provided, that residual securities issued by such Person or
its Subsidiaries shall not be treated as intangibles for purposes of this definition; (ii) any
loans outstanding to any officer or director of Option One or its Affiliates, and (iii) any
receivables from H&R Block, Inc.
Termination Price: As of any Determination Date, an amount without duplication equal
to the greater of (A) the Note Redemption Amount and (B) the sum of (i) the Principal Balance of
each Loan included in the Trust as of the end of the preceding Remittance Period; (ii) all unpaid
interest accrued on the Principal Balance of each such Loan at the related Loan Interest Rate to
the end of the preceding Remittance Period; and (iii) the aggregate fair market value of each
Foreclosure Property included in the Trust as of the end of the preceding Remittance Period, as
determined by an Independent appraiser acceptable to the Majority Noteholders as of a date not more
than 30 days prior to such Payment Date.
Total Required Capital: The sum of total required capital for all assets set forth on
Exhibit H attached hereto.
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Transfer Cut-off Date: With respect to each Loan, (i) the first day of the month
in which the Transfer Date with respect to such Loan occurs or if originated in such month, the
date of origination or (ii) in the case of a purchase from a QSPE Affiliate, unless otherwise
specified in the confirmation delivered in accordance with the Master Disposition Confirmation
Agreement in connection with such purchase, the related Transfer Date.
Transfer Cut-off Date Principal Balance: As to each Loan, its Principal Balance as of
the opening of business on the Transfer Cut-off Date (after giving effect to any payments received
on the Loan before the Transfer Cut-off Date).
Transfer Date: With respect to each Loan, the day such Loan is either (i) sold and
conveyed to the Depositor by the Loan Originator pursuant to the Loan Purchase and Contribution
Agreement and to the Issuer by the Depositor pursuant to Section 2.01 hereof or (ii) sold to the
Issuer pursuant to the Master Disposition Confirmation Agreement, which results in an increase in
the Note Principal Balance by the related Additional Note Principal Balance. With respect to any
Qualified Substitute Loan, the Transfer Date shall be the day such Loan is conveyed to the Trust
pursuant to Section 2.05 or 3.06 hereof.
Transfer Obligation: The obligation of the Loan Originator to make certain payments
under Section 5.06 hereof.
Transfer Obligation Account: The account designated as such, established and
maintained pursuant to Section 5.05 hereof.
Transfer Obligation Target Amount: With respect to any Payment Date, the cumulative
total of all withdrawals pursuant to Section 5.05(e), 5.05(f), 5.05(g), and
5.05(h) hereof from the Transfer Obligation Account to but not including such Payment Date
minus any amount withdrawn from the Transfer Obligation Account to return to the Loan Originator
pursuant to Section 5.05(i)(i).
Trust: Option One Owner Trust 2005-9, the Delaware statutory trust created pursuant to
the Trust Agreement.
Trust Account Property: The Trust Accounts, all amounts and investments held from time
to time in the Trust Accounts and all proceeds of the foregoing.
Trust Accounts: The Distribution Account, the Collection Account, the Advance Account
and the Transfer Obligation Account.
Trust Agreement: The Trust Agreement dated as of December 30, 2005 between the
Depositor and the Owner Trustee, as the same may be further amended or supplemented from time to
time.
Trust Certificate: The meaning assigned thereto in the Trust Agreement.
Trust Estate: Shall mean the assets subject to this Agreement, the Trust Agreement and
the Indenture and assigned to the Trust, which assets consist of (i) such Loans as from time to
time are
subject to this Agreement as listed in the Loan Schedule, as the same may be amended or
supplemented on each Transfer Date and by the removal of Deleted Loans and Unqualified Loans and by
the addition of Qualified Substitute Loans, together with the Servicer’s Loan Files and the
Custodial Loan Files relating thereto and all proceeds thereof, (ii) the Mortgages and security
interests in the Mortgaged Properties, (iii) all payments in respect of interest and principal with
respect to each Loan received on or after the related
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Transfer Cut-off Date, (iv) such assets as from time to time are identified as Foreclosure
Property, (v) such assets and funds as are from time to time deposited in the Distribution Account,
Collection Account, Advance Account and the Transfer Obligation Account, including, without
limitation, amounts on deposit in such accounts that are invested in Permitted Investments, (vi)
lenders’ rights under all Mortgage Insurance Policies and to any Mortgage Insurance Proceeds, (vii)
Net Liquidation Proceeds and Released Mortgaged Property Proceeds, (viii) all right, title and
interest of the Trust (but none of the obligations) in and to the obligations of Hedging
Counterparties under Hedging Instruments (if any) and (ix) all right, title and interest of each of
the Depositor, the Loan Originator and the Trust in and under the Basic Documents including,
without limitation, the obligations of the Loan Originator under the Loan Purchase and Contribution
Agreement, the Master Disposition Confirmation Agreement, and all proceeds of any of the foregoing.
Trust Fees and Expenses: As of each Payment Date, an amount equal to the Servicing,
Compensation, the Owner Trustee Fee, the Indenture Trustee Fee and the Custodian Fee, if any, and
any expenses of the Servicer, the Owner Trustee, the Indenture Trustee or the Custodian.
UCC: The Uniform Commercial Code as in effect in the State of New York.
UCC Assignment: A form “UCC-2” or “UCC-3” statement meeting the requirements of the
Uniform Commercial Code of the relevant jurisdiction to reflect an assignment of a secured party’s
interest in collateral.
UCC-1 Financing Statement: A financing statement meeting the requirements of the
Uniform Commercial Code of the relevant jurisdiction.
Underwriting Guidelines: The underwriting guidelines (including the loan origination
guidelines) of the Loan Originator, as the same may be amended from time to time with notice to the
Noteholder Agent.
Unfunded Transfer Obligation: With respect to any date of determination, an amount
equal to the greater of:
(A) the sum of (i) 10% of the aggregate Sales Prices of all Loans owned by
the Issuer at the close of business on the immediately preceding day minus all payments
actually made by the Loan Originator in respect of the Unfunded Transfer Obligation
pursuant to Section 5.06 hereof with respect to such Loans since the related Transfer Dates
plus (ii) 10% of the aggregate Sales Prices of all Loans purchased by the Issuer on such
date of determination; and
(B) 10% of the average daily aggregate Sales Prices (as of the related
Transfer Date) of all Loans owned by the Issuer over the 90 day period immediately
preceding such date of determination minus all payments actually made by the Loan
Originator in respect of the Unfunded Transfer Obligation pursuant to Section 5.06 with
respect to such Loans.
Unfunded Transfer Obligation Percentage: As of any date of determination, an amount
equal to (x) the Unfunded Transfer Obligation as of such date, divided by (y) 100% of the aggregate
Collateral Values as of the related Transfer Date of all Loans in the Loan Pool.
Unqualified Loan: As defined in Section 3.06(a) hereof
Wet Funded Custodial File Delivery Date: With respect to a Wet Funded Loan, the
fifteenth calendar day after the date the funds for such Wet Funded Loan were released to the
related
23
Borrower, provided that if a Default or Event of Default shall have occurred, the Wet Funded
Custodial File Delivery Date shall be the earlier of (x) such fifteenth calendar day and (y) the
second Business Day after the occurrence of such event.
Wet Funded Loan: A Loan for which the Custodian has not received the related Custodial
Loan File as of the related Transfer Date and for which the Custodian has issued a Trust Receipt
with respect to the Wet Funded Loan, in substantially the form of Exhibit M attached to the
Custodial Agreement.
Whole Loan Sale: A Disposition of Loans in a permanent and outright sale, either
servicing-released or servicing-retained.
Section 1.02 Other Definitional Provisions.
(a) Any agreement, instrument or statute defined or referred to herein or in any
instrument or certificate delivered in connection herewith means such agreement, instrument or
statute as from time to time amended, modified or supplemented and includes (in the case of
agreements or instruments) references to all attachments thereto and instruments incorporated
therein; references to a Person are also to its permitted successors and assigns.
(b) All terms defined in this Agreement shall have the defined meanings when used in
any certificate or other document made or delivered pursuant hereto unless otherwise defined
therein.
(c) As used in this Agreement and in any certificate or other document made or
delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such
certificate or other document, and accounting terms partly defined in this Agreement or in any such
certificate or other document to the extent not defined, shall have the respective meanings given
to them under GAAP. To the extent that the definitions of accounting terms in this Agreement or in
any such certificate or other document are inconsistent with the meanings of such terms under GAAP,
the definitions contained in this Agreement or in any such certificate or other document shall
control.
(d) The words “hereof,” “herein,” “hereunder” and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any particular provision of
this Agreement; Article, Section, Schedule and Exhibit references contained in this Agreement are
references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise
specified; and the term “including” shall mean “including without limitation.”
(e) The definitions contained in this Agreement are applicable to the singular as
well as the plural forms of such terms and to the masculine as well as to the feminine and neuter
genders of such terms.
ARTICLE II
CONVEYANCE OF THE TRUST ESTATE;
ADDITIONAL NOTE PRINCIPAL BALANCES
ADDITIONAL NOTE PRINCIPAL BALANCES
Section 2.01 Conveyance of the Trust Estate; Additional Note Principal Balances.
(a) (i) On the terms and conditions of this Agreement, on each Transfer
Date during the Revolving Period, the Depositor agrees to offer for sale and to sell a portion of
each of the Loans, and contribute to the capital stock of the Issuer the balance of each of the
Loans and deliver the
24
related Loan Documents to or at the direction of the Issuer. To the extent the Issuer has or
is able to obtain sufficient funds under the Note Purchase Agreement and the Notes for the purchase
thereof, the Issuer agrees to purchase such Loans offered for sale by the Depositor. On the terms
and conditions of this Agreement and the Master Disposition Confirmation Agreement, on each
Transfer Date during the Revolving Period, the Issuer may acquire Loans from another QSPE Affiliate
of the Loan Originator to the extent the Issuer has or is able to obtain sufficient funds for the
purchase thereof.
(ii) In consideration of the payment of the Additional Note Principal Balance
pursuant to Section 2.06 hereof and as a contribution to the assets of the Issuer, the
Depositor as of the related Transfer Date and concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the Issuer, without recourse,
but subject to the other terms and provisions of this Agreement, all of the right, title and
interest of the Depositor in and to the Trust Estate.
(iii) During the Revolving Period, on each Transfer Date, subject to the conditions
precedent set forth in Section 2.06 hereof and in accordance with the procedures set forth
in Section 2.01(c), the Depositor, pursuant to an S&SA Assignment, will assign to the
Issuer without recourse all of its respective right, title and interest, in and to the Loans and
all proceeds thereof listed on the Loan Schedule attached to such S&SA Assignment, including all
interest and principal received by the Loan Originator, the Depositor or the Servicer on or with
respect to the Loans on or after the related Transfer Cut-off Date, together with all right, title
and interest in and to the proceeds of any related Mortgage Insurance Policies and all of the
Depositor’s rights, title and interest in and to (but none of its obligations under) the Loan
Purchase and Contribution Agreement and all proceeds of the foregoing.
(iv) The foregoing sales, transfers, assignments, set overs and conveyances do not,
and are not intended to, result in a creation or an assumption by the Issuer of any of the
obligations of the Depositor, the Loan Originator or any other Person in connection with the Trust
Estate or under any agreement or instrument relating thereto except as specifically set forth
herein.
(b) As of the Closing Date and as of each Transfer Date, the Issuer acknowledges (or
will acknowledge, pursuant to the S&SA Assignment) the conveyance to it of the Trust Estate,
including, as applicable, all rights, title and interest of the Depositor and any QSPE Affiliate in
and to the Trust Estate, receipt of which is hereby acknowledged by the Issuer. Concurrently with
such delivery, as of the Closing Date and as of each Transfer Date, pursuant to the Indenture, the
Issuer pledges the Trust Estate to the Indenture Trustee. In addition, concurrently with such
delivery and in exchange therefor, the Owner Trustee, pursuant to the instructions of the
Depositor, has executed (not in its individual capacity, but solely as Owner Trustee on behalf of
the Issuer) and caused the Trust Certificates to be authenticated and delivered to or at the
direction of the Depositor.
(c) (i) Pursuant to and subject to the Note Purchase Agreement, the Issuer
may, at its sole option, from time to time request advances on any Transfer Date of Additional Note
Principal Balances.
(ii) Notwithstanding anything to the contrary herein, in no event shall any Purchaser
be required to advance Additional Note Principal Balances on a Transfer Date if the conditions
precedent with respect to such Transfer Date under Section 2.06 and the conditions
precedent to the purchase of Additional Note Principal Balances set forth in Section 3.01 of the
Note Purchase Agreement have not been fulfilled.
(iii) The Servicer shall appropriately note such Additional Note Principal Balance
(and the increased Note Principal Balance) in the next succeeding Payment Statement; provided,
however, that failure to make any such notation in such Payment Statement or any error in such
notation
25
shall not adversely affect any Noteholder’s rights with respect to its Note Principal Balance
and its right to receive interest and principal payments in respect of the Note Principal Balance
held by such Noteholder. Each Noteholder shall record on the schedule attached to such Noteholder’s
Note, the date and amount of any Additional Note Principal Balance advanced by it; provided, that
failure to make such recordation on such schedule or any error in such schedule shall not adversely
affect any Noteholder’s rights with respect to its Note Principal Balance and its right to receive
interest payments in respect of the Note Principal Balance held by such Noteholder.
(iv) Absent manifest error, the Note Principal Balance of each Note as set forth in
the Noteholder’s records shall be binding upon the Noteholders and the Trust, notwithstanding any
notation made by the Servicer in its Payment Statement pursuant to the preceding paragraph.
Section 2.02 Ownership and Possession of Loan Files.
With respect to each Loan, as of the related Transfer Date the ownership of the related
Promissory Note, the related Mortgage and the contents of the related Servicer’s Loan File and
Custodial Loan File shall be vested in the Trust for the benefit of the Securityholders, although
possession of the Servicer’s Loan File on behalf of and for the benefit of the Securityholders
shall remain with the Servicer, and the Custodian shall take possession of the Custodial Loan Files
as contemplated in Section 2.05 hereof.
Section 2.03 Books and Records Intention of the Parties.
(a) As of each Transfer Date, the sale of each of the Loans conveyed by the
Depositor on such Transfer Date shall be reflected on the balance sheets and other financial
statements of the Depositor and the Loan Originator, as the case may be, as a sale of assets and a
contribution to capital by the Loan Originator and the Depositor, as applicable, under GAAP. Each
of the Servicer and the Custodian shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Loan which shall be clearly marked to reflect the
ownership of each Loan as of the related Transfer Date, by the Issuer and for the benefit of the
Securityholders.
(b) It is the intention of the parties hereto that, other than for federal, state
and local income or franchise tax purposes (as to which no treatment is herein contemplated), the
transfers and assignments of the Trust Estate on the initial Closing Date, on each Transfer Date
and as otherwise contemplated by the Basic Documents and the Assignments shall constitute a sale of
the Trust Estate including, without limitation, the Loans and all other property comprising the
Trust Estate specified in
Section 2.01(a) hereof, from the Depositor to the Issuer and such property shall not
be property of the Depositor. The parties hereto shall treat the Notes as indebtedness for federal,
state and local income and franchise tax purposes.
(c) Each transfer and assignment contemplated by this Agreement shall constitute a
sale in part, and a contribution to capital in part, of the Loans from the Depositor to the Issuer.
Upon the consummation of those transactions the Loans shall be owned by and be the property of the
Issuer, and not owned by or otherwise the property of, the Depositor for any purpose including
without limitation any bankruptcy, receivership, insolvency, liquidation, conservatorship or
similar proceeding relating to either the Depositor or the Issuer or any property of either. The
parties hereto hereby acknowledge that the Issuer and its creditors are relying, and its subsequent
transferees and their creditors will rely, on such sales and contributions being recognized as
such. If (A) any transfer and assignment contemplated hereby is subsequently determined for any
reason under any circumstances to constitute a transfer to secure a loan rather than a sale in
part, and a contribution in part, of the Loans or (B) any Loan is otherwise held to be property of
the Depositor, then this Agreement (i) is and shall be a security agreement within the
26
meaning of Articles 8 and 9 of the applicable Uniform Commercial Code and (ii) shall
constitute a grant by the Depositor to the Issuer of a first priority security interest in all of
the Depositor’s right, title and other interest in and to the Loans and the proceeds and other
distributions and payments and general intangibles and other rights and benefits in respect
thereof. For purposes of perfecting that security interest under any applicable Uniform Commercial
Code, the possession by, and notices and other communications with respect thereto to and from, the
Issuer or any agent thereof, of money, notes and other documents evidencing ownership of and other
rights with respect to the Loans shall be “possession” by the secured party or purchaser and
required notices and other communications to and from applicable financial intermediaries, bailees
and other agents.
(d) The Depositor at its expense shall take such actions as may be necessary or
reasonably requested by the Issuer to ensure the perfection, and priority to all other security
interests, of the security interest described in the preceding paragraph including without
limitation the execution and delivery of such financing statements and amendments thereto,
continuation statements and other documents as the Issuer may reasonably request.
Section 2.04 Delivery of Loan Documents.
(a) With respect to each Loan, the Loan Originator shall, prior to the related
Transfer Date (or in the case of each Wet Funded Loan, on or before the related Wet Funded
Custodial File Delivery Date), in accordance with the terms and conditions set forth in the
Custodial Agreement, deliver or cause to be delivered to the Custodian, as the designated agent of
the Indenture Trustee, a Loan Schedule, and each of the documents constituting the related
Custodial Loan File. The Loan Originator shall ensure that (i) in the event that any Wet Funded
Loan is not closed and funded to the order of the appropriate Borrower on the day funds are
provided to the Loan Originator by the applicable Purchaser, on behalf of the Issuer, such funds
shall be promptly returned to such Purchaser, on behalf of the Issuer and (ii) in the event that
any Wet Funded Loan is subject to a rescission, all funds received in connection with such
rescission shall be promptly returned to such Purchaser, on behalf of the Issuer.
(b) With respect to each Loan, the Loan Originator shall, on the related Transfer
Date (or in the case of each Wet Funded Loan, on or before the related Wet Funded Custodial File
Delivery Date), deliver or cause to be delivered to the Servicer the related Servicer’s Loan File
(i) for the benefit of, and as agent for, the Noteholders and (ii) for the benefit of the Indenture
Trustee, on behalf of the
Noteholders, for so long as the Notes are outstanding; after the Notes are not outstanding,
the Servicer’s Loan File shall be held in the custody of the Servicer for the benefit of, and as
agent for, the Certificateholders.
(c) The Indenture Trustee shall cause the Custodian to take and maintain continuous
physical possession of the Custodial Loan Files in the State of California (or upon prior written
notice from the Custodian to the Loan Originator and the Noteholder Agent and delivery of an
Opinion of Counsel with respect to the continued perfection of the Indenture Trustee’s security
interest, in the State of Minnesota or Utah) and, in connection therewith, shall act solely as
agent for the Noteholders in accordance with the terms hereof and not as agent for the Loan
Originator, the Servicer or any other party.
Section 2.05 Acceptance by the Indenture Trustee of the Loans; Certain Substitutions
and Repurchases; Certification by the Custodian.
(a) The Indenture Trustee declares that it will cause the Custodian to hold the
Custodial Loan Files and any additions, amendments, replacements or supplements to the documents
contained therein, as well as any other assets included in the Trust Estate and delivered to the
Custodian, in trust, upon and subject to the conditions set forth herein. The Indenture Trustee
further agrees to cause
27
the Custodian to execute and deliver such certifications as are required under the Custodial
Agreement and to otherwise direct the Custodian to perform all of its obligations with respect to
the Custodial Loan Files in strict accordance with the terms of the Custodial Agreement.
(b) (i) With respect to (1) any non-Wet Funded Loan which has a Fatal
Exception in the Exceptions Report, the Loan Originator shall cure such exceptions by delivering
such missing documents to the Custodian or otherwise curing the exceptions within one (1) Business
Day of the Transfer Date, (2) any non-Wet Funded Loans which are set forth as exceptions in the
Exceptions Report (other than Fatal Exceptions) (a “Non-Fatal Exception”), the Loan
Originator shall cure such exceptions by delivering such missing documents to the Custodian or
otherwise curing the defect within thirty (30) calendar days of the Transfer Date; or (3) any Wet
Funded Loans which are set forth as exceptions in the Exceptions Report, the Loan Originator shall
cure such exceptions by delivering such missing documents to the Custodian or otherwise curing the
defect no later than one (1) Business Day after the Wet Funded Custodial File Delivery Date, in
each case, following the receipt of the first Exceptions Report listing such exception with respect
to such Loan.
(ii) In the event that, with respect to any Loan, the Loan Originator does not comply
with the document delivery requirements of this Section 2.05 (including the failure of Loan
Originator to cure any exceptions as provided in this Section 2.05), and such failure has a
material adverse effect on the value or enforceability of any Loan, or the interests of the
Securityholders in any Loan, the Loan Originator shall repurchase such Loan within one (1) Business
Day of notice thereof from the Indenture Trustee or the Noteholder Agent at the Repurchase Price
thereof with respect to such Loan by depositing such Repurchase Price in the Collection Account. In
lieu of such a repurchase, the Depositor and Loan Originator may comply with the substitution
provisions of Section 3.06 hereof. The Loan Originator shall provide the Servicer, the
Indenture Trustee, the Issuer and the Noteholder Agent with a certification of a Responsible
Officer on or prior to such repurchase or substitution indicating that the Loan Originator intends
to repurchase or substitute such Loan.
(iii) It is understood and agreed that the obligation of the Loan Originator to
repurchase or substitute any such Loan pursuant to this Section 2.05(b) shall constitute
the sole remedy with respect to such failure to comply with the foregoing delivery requirements.
(c) In performing its reviews of the Custodial Loan Files pursuant to the Custodial
Agreement, the Custodian shall have no responsibility to determine the genuineness of any document
contained therein and any signature thereon. The Custodian shall not have any responsibility for
determining whether any document is valid and binding, whether the text of any assignment or
endorsement is in proper or recordable form, whether any document has been recorded in accordance
with the requirements of any applicable jurisdiction, or whether a blanket assignment is permitted
in any applicable jurisdiction.
(d) The Servicer’s Loan File shall be held in the custody of the Servicer (i) for
the benefit of, and as agent for, the Noteholders and (ii) for the benefit of the Indenture
Trustee, on behalf of the Noteholders, for so long as the Notes are outstanding; after the Notes
are not outstanding, the Servicer’s Loan File shall be held in the custody of the Servicer for the
benefit of, and as agent for, the Certificateholders. It is intended that, by the Servicer’s
agreement pursuant to this Section 2.05(d), the Indenture Trustee shall be deemed to have
possession of the Servicer’s Loan Files for purposes of Section 9-313 of the UCC of the state in
which such documents or instruments are located. The Servicer shall promptly report to the
Indenture Trustee any failure by it to hold the Servicer’s Loan File as herein provided and shall
promptly take appropriate action to remedy any such failure. In acting as custodian of such
documents and instruments, the Servicer agrees not to assert any legal or beneficial ownership
interest in the Loans or such documents or instruments. Subject to Section 8.01(d) hererof,
the Servicer
28
agrees to indemnify the Securityholders and the Indenture Trustee, their officers, directors,
employees, agents and “control persons” as such term is used under the Act and under the Securities
Exchange Act of 1934, as amended for any and all liabilities, obligations, losses, damages,
payments, costs or expenses of any kind whatsoever which may be imposed on, incurred by or asserted
against the Securityholders or the Indenture Trustee as the result of the negligence or willful
misconduct by the Servicer relating to the maintenance and custody of such documents or instruments
which have been delivered to the Servicer; provided, however, that the Servicer will not be liable
for any portion of any such amount resulting from the negligence or willful misconduct of any
Securityholders or the Indenture Trustee; and provided, further, that the Servicer will not be
liable for any portion of any such amount resulting from the Servicer’s compliance with any
instructions or directions consistent with this Agreement issued to the Servicer by the Indenture
Trustee or the Majority Noteholders. The Indenture Trustee shall have no duty to monitor or
otherwise oversee the Servicer’s performance as custodian of the Servicer Loan File hereunder.
Section 2.06 Conditions Precedent to Transfer.
(a) In the case of Wet Funded Loans, by 4:00 p.m. (New York City time) one (1)
Business Day prior to the related Transfer Date, the Issuer shall give notice to the Noteholder
Agent of such upcoming Transfer Date and shall deliver or cause to be delivered to the Noteholder
Agent: an estimated funding request amount. By 4:00 p.m. (New York City time) on the related
Transfer Date, and up to two times on each such day, the Issuer shall deliver or cause to be
delivered to the Noteholder Agent a final funding request amount, and to the Noteholder Agent and
the Custodian (i) a Wet Funded Loan Schedule in computer-readable form with respect to the Loans
requested to be transferred on such Transfer Date, (ii) an LPA Assignment, and (iii) an S&SA
Assignment.
(b) In the case of non-Wet Funded Loans, by 4:00 p.m. (New York City time) two (2)
Business Days prior to each Transfer Date, the Issuer shall give notice to the Noteholder Agent of
such upcoming Transfer Date and shall deliver or cause to be delivered to the Noteholder Agent a
preliminary Loan Schedule. By 8:00 a.m. (New York City time) on the related Transfer Date, the
Issuer shall deliver or cause to be delivered to the Noteholder Agent: (i) a final Loan Schedule in
computer-readable form with respect to the Loans requested to be transferred on such Transfer Date,
(ii) an LPA Assignment, and (iii) an S&SA Assignment.
(c) On each Transfer Date, the Depositor or the applicable QSPE Affiliate shall
convey to the Issuer, the Loans and the other property and rights related thereto described in the
related S&SA Assignment, and the Issuer, only upon the satisfaction of each of the conditions set
forth below on or prior to such Transfer Date, shall deposit or cause to be deposited cash in the
amount of the Additional Note Principal Balance received from the applicable Purchaser in the
Advance Account in respect thereof, and the Paying Agent shall, promptly after such deposit,
withdraw the amount deposited in respect of applicable Additional Note Principal Balance from the
Advance Account, and distribute such amount to or at the direction of the Depositor or the
applicable QSPE Affiliate in payment of the Sales Price for the related Loans.
(d) As of the Closing Date and each Transfer Date:
(i) the Depositor, the QSPE Affiliate and the Servicer, as applicable,
shall have delivered to the Issuer and the Noteholder Agent duly executed Assignments,
which shall have attached thereto a Loan Schedule setting forth the appropriate information
with respect to all Loans conveyed on such Transfer Date and shall have delivered to the
Noteholder Agent a computer readable transmission of such Loan Schedule;
29
(ii) the Depositor shall have deposited, or caused to be deposited, in
the Collection Account all collections received with respect to each of the Loans on and
after the applicable Transfer Cut-off Date or, in the case of purchases from a QSPE
Affiliate, such QSPE Affiliate shall have deposited, or caused to be deposited, in the
Collection Account all collections received with respect to each of the Loans and allocable
to the period after the related Transfer Date;
(iii) as of such Transfer Date, none of the Loan Originator, the Depositor or
the QSPE Affiliate, as applicable, shall (A) be insolvent, (B) be made insolvent by its
respective sale of Loans or (C) have reason to believe that its insolvency is imminent;
(iv) the Revolving Period shall not have terminated;
(v) as of such Transfer Date (after giving effect to the sale of Loans on
such Transfer Date), there shall be no Overcollateralization Shortfall;
(vi) in the case of non-Wet Funded Loans, the Issuer shall have delivered the
Custodial Loan File to the Custodian in accordance with the Custodial Agreement and the
Noteholder Agent shall have received a Trust Receipt by 12:00 noon New York City time on
the
Transfer Date reflecting such delivery, or, in the case of Wet Funded Loans, the
Issuer shall have delivered the Wet Funded Loan Schedule to the Custodian in accordance
with the Custodial Agreement and the Noteholder Agent shall have received a Trust Receipt
within one (1) hour of receipt by the Custodian of such Wet Funded Loan Schedule,
reflecting such delivery;
(vii) each of the representations and warranties made by the Loan Originator
contained in Exhibit F with respect to the Loans shall be true and correct in all
material respects as of the related Transfer Date with the same effect as if then made and
the proviso set forth in Section 3.05 hereof with respect to Loans sold by a QSPE
Affiliate shall not be applicable to any Loans, and the Depositor or the QSPE Affiliate, as
applicable, shall have performed all obligations to be performed by it under the Basic
Documents on or prior to such Transfer Date;
(viii) the Depositor or the QSPE Affiliate shall, at its own expense, within one
(1) Business Day following the Transfer Date, indicate in its computer files that the Loans
identified in each S&SA Assignment have been sold to the Issuer pursuant to this Agreement
and the S&SA Assignment;
(ix) the Depositor or the QSPE Affiliate shall have taken any action requested
by the Indenture Trustee, the Issuer or the Noteholders required to maintain the ownership
interest of the Issuer in the Trust Estate;
(x) no selection procedures believed by the Depositor or the QSPE Affiliate
to be adverse to the interests of the Noteholders shall have been utilized in selecting the
Loans to be conveyed on such Transfer Date;
(xi) the Depositor shall have provided the Issuer, the Indenture Trustee and
the Noteholder Agent no later than two (2) Business Days prior to such date a notice of
Additional Note Principal Balance in the form of Exhibit A hereto;
(xii) after giving effect to the Additional Note Principal Balance associated
therewith, the Note Principal Balance will not exceed the Maximum Note Principal Balance;
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(xiii) all conditions precedent to the Depositor’s purchase of Loans
pursuant to the Loan Purchase and Contribution Agreement shall have been fulfilled as of
such Transfer Date, and, in the case of purchases from a QSPE Affiliate, all conditions
precedent to the Issuer’s purchase of Loans pursuant to the Master Disposition Confirmation
Agreement shall have been fulfilled as of such Transfer Date;
(xiv) all conditions precedent to the Noteholders’ purchase of Additional Note
Principal Balance pursuant to the Note Purchase Agreement shall have been fulfilled as of
such Transfer Date; and
(xv) with respect to each Loan acquired from any QSPE Affiliate that has a
limited right of recourse to the Loan Originator under the terms of the applicable loan
purchase agreement, the Loan Originator has not been required to pay any amount to or on
behalf of such QSPE Affiliate that lowered the recourse to the Loan Originator available to
such QSPE Affiliate below the maximum recourse to the Loan Originator available to such
QSPE Affiliate under the
terms of the related loan purchase contract providing for recourse by that QSPE
Affiliate to the Loan Originator.
Section 2.07 Termination or Suspension of Revolving Period.
At the end of the Revolving Period or upon the occurrence of (i) an Event of Default or
Default, (ii) a Rapid Amortization Trigger, or (iii) the Unfunded Transfer Obligation Percentage
equals 4% or less, or (iv) Option One or any of its Affiliates shall default under, or shall
otherwise materially breach the terms of any repurchase agreement, loan and security agreement or
similar credit facility or agreement entered into by Option One or any of its Affiliates, including
without limitation, (1) the Sale and Servicing Agreement, dated as of April 1, 2001, among the
Option One Owner Trust 2001-1A, the Depositor, Option One and the Indenture Trustee, (2) the Sale
and Servicing Agreement, dated as of April 1, 2001, among the Option One Owner Trust 2001-1B, the
Depositor, Option One and the Indenture Trustee, (3) the Sale and Servicing Agreement, dated as of
July 2, 2002, among the Option One Owner Trust 2002-3, the Depositor, Option One and the Indenture
Trustee, (4) the Sale and Servicing Agreement, dated as of August 8, 2003, among the Option One
Owner Trust 2003-4, the Depositor, Option One and the Indenture Trustee, (5) the Sale and Servicing
Agreement, dated as of November 1, 2003, among the Option One Owner Trust 2003-5, the Depositor,
Option One and the Indenture Trustee, (6) the Sale and Servicing Agreement, dated as of June 1,
2005, among the Option One Owner Trust 2005-6, the Depositor, Option One and the Indenture Trustee,
(7) the Sale and Servicing Agreement, dated as of September 1, 2005, among the Option One Owner
Trust 2005-7, the Depositor, Option One and the Indenture Trustee, and (8) the Sale and Servicing
Agreement, dated as of October 1, 2005, among the Option One Owner Trust 2005-8, the Depositor,
Option One and the Indenture Trustee, and such default, failure or breach entitles any counterparty
to declare the Indebtedness thereunder to be due and payable prior to the maturity thereof, the
Noteholder Agent may, in any such case, in its sole discretion, terminate the Revolving Period.
Section 2.08 Correction of Errors.
The parties hereto who have relevant information shall cooperate to reconcile any errors in
calculating the Sales Price from and after the Closing Date. In the event that an error in the
Sales Price is discovered by either party, including without limitation, any error due to
miscalculations of Market Value where insufficient information has been provided with respect to a
Loan to make an accurate determination of Market Value as of any applicable Transfer Date, any
miscalculations of Principal Balance, accrued interest, Overcollateralization Shortfall or
aggregate unreimbursed Servicing Advances attributable to the applicable Loan, or any prepayments
not properly credited, such party shall give
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prompt notice to the other parties hereto, and the party that shall have benefited from such
error shall promptly remit to the other, by wire transfer of immediately available funds the amount
of such error with no interest thereon.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations, Warranties and Covenants of the Depositor.
The Depositor hereby represents, warrants and covenants to the other parties hereto and the
Securityholders that as of the Closing Date and as of each Transfer Date:
(a) The Depositor is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization and has, and had at all relevant
times, full power to own its property, to carry on its business as currently conducted, to enter
into and perform its obligations under each Basic Document to which it is a party;
(b) The execution and delivery by the Depositor of each Basic Document to which the
Depositor is a party and its performance of and compliance with all of the terms thereof will not
violate the Depositor’s organizational documents or constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, or result in the breach or
acceleration of, any material contract, agreement or other instrument to which the Depositor is a
party or which are applicable to the Depositor or any of its assets;
(c) The Depositor has the full power and authority to enter into and consummate the
transactions contemplated by each Basic Document to which the Depositor is a party, has duly
authorized the execution, delivery and performance of each Basic Document to which it is a party
and has duly executed and delivered each Basic Document to which it is a party; each Basic Document
to which it is a party, assuming due authorization, execution and delivery by the other party or
parties thereto, constitutes a valid, legal and binding obligation of the Depositor, enforceable
against it in accordance with the terms thereof, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to
or affecting the rights of creditors generally, and by general equity principles (regardless of
whether such enforcement is considered in a proceeding in equity or at law);
(d) The Depositor is not in violation of, and the execution and delivery by the
Depositor of each Basic Document to which the Depositor is a party and its performance and
compliance with the terms of each Basic Document to which the Depositor is a party will not
constitute a violation with respect to, any order or decree of any court or any order or regulation
of any federal, state, municipal or governmental agency having jurisdiction, which violation would
materially and adversely affect the condition (financial or otherwise) or operations of the
Depositor or any of its properties or materially and adversely affect the performance of any of its
duties hereunder;
(e) There are no actions or proceedings against, or investigations of, the Depositor
currently pending with regard to which the Depositor has received service of process and no action
or proceeding against, or investigation of, the Depositor is, to the knowledge of the Depositor,
threatened or otherwise pending before any court, administrative agency or other tribunal (A) that
if determined adversely to the Depositor, would have a reasonable possibility of prohibiting or
preventing its entering into any of the Basic Documents to which it is a party or render the
Securities invalid, (B) that seeks to prevent the issuance of the Securities or the consummation of
any of the transactions contemplated by any
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of the Basic Documents to which it is a party, (C) that if determined adversely to the
Depositor, would reasonably be expected to prohibit or materially and adversely affect (i) the sale
of the Loans to the Issuer, (ii) the performance by the Depositor of its obligations under, or the
validity or enforceability of, any of the Basic Documents to which it is a party, (iii) the
Securities, or (D) as to which there is a reasonable possibility of an adverse determination of
such action, proceeding or investigation that would affect the satisfaction by the Loan Originator
of the Financial Covenants;
(f) No consent, approval, authorization or order of any court or governmental agency
or body is required for the execution, delivery and performance by the Depositor of, or compliance
by the Depositor with, any of the Basic Documents to which the Depositor is a party or the
Securities, or
for the consummation of the transactions contemplated by any of the Basic Documents to which
the Depositor is a party, except for such consents, approvals, authorizations and orders, if any,
that have been obtained prior to such date;
(g) The Depositor is solvent, is able to pay its debts as they become due and has
capital sufficient to carry on its business and its obligations hereunder; it will not be rendered
insolvent by the execution and delivery of any of the Basic Documents to which it is a party or the
assumption of any of its obligations thereunder; no petition of bankruptcy (or similar insolvency
proceeding) has been filed by or against the Depositor;
(h) The Depositor did not transfer the Loans sold thereon by the Depositor to the
Trust with any intent to hinder, delay or defraud any of its creditors; nor will the Depositor be
rendered insolvent as a result of such sale;
(i) The Depositor had good title to, and was the sole owner of, each Loan sold
thereon by the Depositor free and clear of any lien other than any such lien released
simultaneously with the sale contemplated herein, and, immediately upon each transfer and
assignment herein contemplated, the Depositor will have delivered to the Trust good title to, and
the Trust will be the sole owner of, each Loan transferred by the Depositor thereon free and clear
of any lien;
(j) The Depositor acquired title to each of the Loans sold thereon by the Depositor
in good faith, without notice of any adverse claim;
(k) None of the Basic Documents to which the Depositor is a party, nor any Officer’s
Certificate, statement, report or other document prepared by the Depositor and furnished or to be
furnished by it pursuant to any of the Basic Documents to which it is a party or in connection with
the transactions contemplated thereby contains any untrue statement of material fact or omits to
state a material fact necessary to make the statements contained herein or therein not misleading;
(l) The Depositor is not required to be registered as an “investment company,”
under the Investment Company Act of 1940, as amended;
(m) The transfer, assignment and conveyance of the Loans by the Depositor thereon
pursuant to this Agreement is not subject to the bulk transfer laws or any similar statutory
provisions in effect in any applicable jurisdiction;
(n) The Depositor’s principal place of business and chief executive offices are
located at Irvine, California or at such other address as shall be designated by such party in a
written notice to the other parties hereto;
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(o) The Depositor covenants that during the continuance of this Agreement it
will comply in all respects with the provisions of its organizational documents in effect from time
to time; and
(p) The representations and warranties set forth in (h), (i), (j) and (m) above were
true and correct (with respect to the applicable QSPE Affiliate) with respect to each Loan
transferred to the Trust by any QSPE Affiliate at the time such Loan was transferred to a QSPE
Affiliate.
Section 3.02 Representations, Warranties and Covenants of the Loan Originator.
The Loan Originator hereby represents, warrants and covenants to the other parties hereto and
the Securityholders that as of the Closing Date and as of each Transfer Date:
(a) The Loan Originator is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization and (i) is duly qualified, in
good standing and licensed to carry on its business in each state where any Mortgaged Property
related to a Loan sold by it is located and (ii) is in compliance with the laws of any such
jurisdiction, in both cases, to the extent necessary to ensure the enforceability of such Loans in
accordance with the terms thereof and had at all relevant times, full corporate power to originate
such Loans, to own its property, to carry on its business as currently conducted and to enter into
and perform its’ obligations under each Basic Document to which it is a party;
(b) The execution and delivery by the Loan Originator of each Basic Document to
which it is a party and its performance of and compliance with the terms thereof will not violate
the Loan Originator’s articles of organization or by-laws or constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under, or result in the
breach or acceleration of, any contract, agreement or other instrument to which the Loan Originator
is a party or which may be applicable to the Loan Originator or any of its assets;
(c) The Loan Originator has the full power and authority to enter into and
consummate all transactions contemplated by the Basic Documents to be consummated by it, has duly
authorized the execution, delivery and performance of each Basic Document to which it is a party
and has duly executed and delivered each Basic Document to which it is a party; each Basic Document
to which it is a party, assuming due authorization, execution and delivery by each of the other
parties thereto, constitutes a valid, legal and binding obligation of the Loan Originator,
enforceable against it in accordance with the terms hereof, except as such enforcement may be
limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws
relating to or affecting the rights of creditors generally, and by general equity principles
(regardless of whether such enforcement is considered in a proceeding in equity or at law);
(d) The Loan Originator is not in violation of, and the execution and delivery of
each Basic Document to which it is a party by the Loan Originator and its performance and
compliance with the terms of each Basic Document to which it is a party will not constitute a
violation with respect to, any order or decree of any court or any order or regulation of any
federal, state, municipal or governmental agency having jurisdiction, which violation would
materially and adversely affect the condition (financial or otherwise) or operations of the Loan
Originator or its properties or materially and adversely affect the performance of its duties under
any Basic Document to which it is a party;
(e) There are no actions or proceedings against, or investigations of, the Loan
Originator currently pending with regard to which the Loan Originator has received service of
process and no action or proceeding against, or investigation of, the Loan Originator is, to the
knowledge of the Loan Originator, threatened or otherwise pending before any court, administrative
agency or other
34
tribunal (A) that if determined adversely to the Loan Originator, would have a reasonable
possibility of prohibiting or preventing its entering into any Basic Document to which it is a
party or render the Securities invalid, (B) that seeks to prevent the issuance of the Securities or
the consummation of any of the transactions contemplated by any Basic Document to which it is a
party, (C) that if determined adversely to
the Loan Originator, would reasonably be expected to prohibit or materially and adversely affect
the (i) the sale of the Loans to the Depositor, (ii) the performance by the Loan Originator of its
obligations under, or the validity or enforceability of, any of the Basic Documents to which it is
a party, (iii) the Securities, or (D) as to which there is a reasonable possibility of an adverse
determination of such action, proceeding or investigation that would affect the satisfaction by the
Loan Originator of the Financial Covenants;
(f) No consent, approval, authorization or order of any court or governmental agency
or body is required for: (1) the execution, delivery and performance by the Loan Originator of, or
compliance by the Loan Originator with, any Basic Document to which it is a party, (2) the issuance
of the Securities, (3) the sale and contribution of the Loans, or (4) the consummation of the
transactions required of it by any Basic Document to which it is a party, except such as shall have
been obtained before such date;
(g) Immediately prior to the sale of any Loan to the Depositor, the Loan Originator
had good title to such Loan sold by it on such date, without notice of any adverse claim;
(h) The information, reports, financial statements, exhibits and schedules furnished
in writing by or on behalf of the Loan Originator to the Noteholder Agent in connection with the
negotiation, preparation or delivery of the Basic Documents to which it is a party or delivered
pursuant thereto, when taken as a whole, do not contain any untrue statement of material fact or
omit to state any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. All written information furnished after
the date hereof by or on behalf of the Loan Originator to the Noteholder Agent or any Noteholder in
connection with the Basic Documents to which it is a party and the transactions contemplated
thereby will be true, complete and accurate in every material respect, or (in the case of
projections) based on reasonable estimates, on the date as of which such information is stated or
certified.
(i) The Loan Originator is solvent, is able to pay its debts as they become due and
has capital sufficient to carry on its business and its obligations under each Basic Document to
which it is a party; it will not be rendered insolvent by the execution and delivery of this
Agreement or by the performance of its obligations under each Basic Document to which it is a
party; no petition of bankruptcy (or similar insolvency proceeding) has been filed by or against
the Loan Originator prior to the date hereof;
(j) The Loan Originator has transferred the Loans transferred by it on or prior to
such Transfer Date without any intent to hinder, delay or defraud any of its creditors;
(k) The Loan Originator has received fair consideration and reasonably equivalent
value in exchange for the Loans sold by it on such Transfer Date to the Depositor;
(l) The Loan Originator has not dealt with any broker or agent or other Person who
might be entitled to a fee, commission or compensation in connection with the transaction
contemplated by this Agreement;
35
(m) The Loan Originator has not engaged in any practice or activity with respect
to the Loans that is predatory, abusive, deceptive or otherwise wrongful under the statutes,
regulations and ordinances, if any, that are applicable to the Loans, or that is otherwise
actionable;
(n) The Loan Originator is in compliance with each of the Financial Covenants; and
(o) The Loan Originator’s principal place of business and chief executive offices
are located at Irvine, California or at such other address as shall be designated by such party in
a written notice to the other parties hereto.
It is understood and agreed that the representations, warranties and covenants set forth in
this Section 3.02 shall survive delivery of the respective Custodial Loan Files to the
Indenture Trustee or the Custodian on its behalf and shall inure to the benefit of the
Securityholders, the Depositor, the Servicer, the Indenture Trustee, the Owner Trustee and the
Issuer. Upon discovery by the Loan Originator, the Depositor, the Servicer, the Indenture Trustee,
the Owner Trustee or the Issuer of a breach of any of the foregoing representations and warranties
that materially and adversely affects the value of any Loan or the interests of the Securityholders
in any Loan or in the Securities, the party discovering such breach shall give prompt written
notice (but in no event later than two (2) Business Days following such discovery) to the other
parties. The obligations of the Loan Originator set forth in Sections 2.05 and 3.06
hereof to cure any breach or to substitute for or repurchase an affected Loan shall constitute the
sole remedies available hereunder to the Securityholders, the Depositor, the Servicer, the
Indenture Trustee, the Owner Trustee or the Issuer respecting a breach of the representations and
warranties contained in this Section 3.02. The fact that the Noteholder Agent or any Noteholder has
conducted or has failed to conduct any partial or complete due diligence investigation of the Loan
Files shall not affect the Securityholders’ rights to demand repurchase or substitution as provided
under this Agreement.
Section 3.03 Representations, Warranties and Covenants of the Servicer.
The Servicer hereby represents and warrants to and covenants with the other parties hereto and
the Securityholders that as of the Closing Date and as of each Transfer Date:
(a) The Servicer is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and (i) is duly qualified, in good standing and
licensed to carry on its business in each state where any Mortgaged Property is located, and (ii)
is in compliance with the laws of any such state, in both cases, to the extent necessary to ensure
the enforceability of the Loans in accordance with the terms thereof and to perform its duties
under each Basic Document to which it is a party and had at all relevant times, full corporate
power to own its property, to carry on its business as currently conducted, to service the Loans
and to enter into and perform its obligations under each Basic Document to which it is a party;
(b) The execution and delivery by the Servicer of each Basic Document to which it is
a party and its performance of and compliance with the terms thereof will not violate the
Servicer’s articles of incorporation or by-laws or constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, or result in the breach or
acceleration of any material contract, agreement or other instrument to which the Servicer is a
party or which are applicable to the Servicer or any of its assets;
(c) The Servicer has the full power and authority to enter into and consummate all
transactions contemplated by each Basic Document to which it is a party, has duly authorized the
execution, delivery and performance of each Basic Document to which it is a party and has duly
executed and delivered each Basic Document to which it is a party. Each Basic Document to which it
is a party,
36
assuming due authorization, execution and delivery by each of the other parties thereto,
constitutes a valid, legal and binding obligation of the Servicer, enforceable against it in
accordance with the terms hereof, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, receivership, moratorium or other similar laws relating to or affecting
the rights of creditors generally, and by general equity principles (regardless of whether such
enforcement is considered in a proceeding in equity or at law);
(d) The Servicer is not in violation of, and the execution and delivery of each
Basic Document to which it is a party by the Servicer and its performance and compliance with the
terms of each Basic Document to which it is a party will not constitute a violation with respect
to, any order or decree of any court or any order or regulation of any federal, state, municipal or
governmental agency having jurisdiction, which violation would materially and adversely affect the
condition (financial or otherwise) or operations of the Servicer or materially and adversely affect
the performance of its duties under any Basic Document to which it is a party;
(e) There are no actions or proceedings against, or investigations of, the Servicer
currently pending with regard to which the Servicer has received service of process and no action
or proceeding against, or investigation of, the Servicer is, to the knowledge of the Servicer,
threatened or otherwise pending before any court, administrative agency or other tribunal (A) that
if determined adversely to the Servicer, would have a reasonable possibility of prohibiting or
preventing its entering into any Basic Document to which it is a party, (B) that seeks to prevent
the consummation of any of the transactions contemplated by any Basic Document to which it is a
party, (C) that if determined adversely to the Servicer, would reasonably be expected to prohibit
or materially and adversely affect (i) the performance by the Servicer of its obligations under, or
the validity or enforceability of, any Basic Document to which it is a party, or (ii) the
Securities, or (D) as to which there is a reasonable possibility of an adverse determination of
such action, proceeding or investigation that would affect the satisfaction by the Loan Originator
of the Financial Covenants;
(f) No consent, approval, authorization or order of any court or governmental agency
or body is required for the execution, delivery and performance by the Servicer of, or compliance
by the Servicer with, any Basic Document to which it is a party or the Securities, or for the
consummation of the transactions contemplated by any Basic Document to which it is a party, except
for such consents, approvals, authorizations and orders, if any, that have been obtained prior to
such date;
(g) The information, reports, financial statements, exhibits and schedules furnished
in writing by or on behalf of the Servicer to the Majority Noteholders in connection with the
negotiation, preparation or delivery of the Basic Documents to which it is a party or delivered
pursuant thereto, when taken as a whole, do not contain any untrue statement of material fact or
omit to state any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. All written information furnished after
the date hereof by or on behalf of the Servicer to the Majority Noteholders in connection with the
Basic Documents to which it is a party and the transactions contemplated thereby will be true,
complete and accurate in every material respect, or (in the case of projections) based on
reasonable estimates, on the date as of which such information is stated or certified.
(h) The Servicer is solvent and will not be rendered insolvent as a result of the
performance of its obligations pursuant to under the Basic Documents to which it is a party;
(i) The Servicer acknowledges and agrees that the Servicing Compensation represents
reasonable compensation for the performance of its services hereunder and that the entire Servicing
Compensation shall be treated by the Servicer, for accounting purposes, as compensation for the
servicing and administration of the Loans pursuant to this Agreement;
37
(j) The Servicer is in compliance with each of the Financial Covenants;
(k) Each Subservicer is an Eligible Servicer and the Servicer covenants to cause
each Subservicer to be an Eligible Servicer; and
(l) The Servicer has not engaged in any practice or activity with respect to the
Loans, or any other loans, that is predatory, abusive, deceptive or otherwise wrongful under the
statutes, regulations and ordinances, if any, that are applicable to the particular loans, or that
is otherwise actionable.
It is understood and agreed that the representations, warranties and covenants set forth in
this Section 3.03 shall survive delivery of the respective Custodial Loan Files to the
Indenture Trustee or the Custodian on its behalf and shall inure to the benefit of the Depositor,
the Securityholders, the Indenture Trustee, the Owner Trustee and the Issuer. Upon discovery by the
Loan Originator, the Depositor, the Servicer, the Indenture Trustee, the Owner Trustee or the
Issuer of a breach of any of the foregoing representations, warranties and covenants that
materially and adversely affects the value of any Loan or the interests of the Securityholders in
any Loan or in the Securities, the party discovering such breach shall give prompt written notice
(but in no event later than two (2) Business Days following such discovery) to the other parties.
The fact that the Noteholder Agent or any Noteholder has conducted or has failed to conduct any
partial or complete due diligence investigation shall not affect the Securityholders’ rights to
exercise their remedies as provided under this Agreement.
Section 3.04 Reserved.
Section 3.05 Representations and Warranties Regarding Loans. The Loan Originator
makes each of the representations and warranties set forth on Exhibit F hereto with respect
to each Loan, provided, however, that with respect to each Loan proposed to be transferred to the
Issuer by a QSPE Affiliate, to the extent that the Loan Originator has at the time of such transfer
actual knowledge of any facts or circumstances that would render any of such representations or
warranties materially false, the Loan Originator shall notify the Noteholder Agent of such facts or
circumstances and, in such event, shall have no obligation to make such materially false
representation and warranty and the Issuer shall not purchase such Loan. In addition, the Loan
Originator represents and warrants with respect to each Loan sold by a QSPE Affiliate that the Loan
Originator has not been required to pay any amount to or on behalf of such QSPE Affiliate that
lowered the recourse to the Loan Originator available to such QSPE Affiliate below the maximum
recourse to the Loan Originator available to such QSPE Affiliate under the terms of any loan
purchase agreement providing for recourse by that QSPE Affiliate to the Loan Originator.
Section 3.06 Purchase and Substitution.
(a) It is understood and agreed that the representations and warranties set forth in
Exhibit F hereto shall survive the conveyance of the Loans to the Indenture Trustee on behalf of
the Issuer, and the delivery of the Securities to the Securityholders. Upon discovery by the
Depositor, the Servicer, the Loan Originator, the Custodian, the Issuer, the Indenture Trustee, the
Owner Trustee or any Securityholder of a breach of any of such representations and warranties or
the representations and warranties of the Depositor, Loan Originator or Servicer set forth in
Sections 3.01, 3.02 or 3.03, respectively, which materially and adversely
affects the value or enforceability of any Loan or the interests of the Securityholders in any Loan
(notwithstanding that such representation and warranty was made to the Depositor’s, Loan
Originator’s or Servicer’s best knowledge) or which, constitutes a breach of the representations
and warranties set forth in Exhibit F, the party discovering such breach shall give prompt
written notice (but in no event later than two (2) Business Days following such discovery) to the
others. The Depositor, Loan Originator or Servicer, as applicable, shall, within five (5) Business
Days of
38
the earlier of the Depositor’s, Loan Originator’s or Servicer’s discovery or the Depositor’s,
Loan Originator’s or Servicer’s receiving notice of any breach of a representation or warranty,
promptly cure such breach in all material respects. If within five (5) Business Days after the
earlier of the Depositor’s, Loan Originator’s or Servicer’s discovery of such breach or the
Depositor’s, Loan Originator’s or Servicer’s receiving notice thereof such breach has not been
remedied by the Depositor, Loan Originator or Servicer, as applicable, and such breach materially
and adversely affects the interests of the Securityholders in the related Loan (an “Unqualified
Loan”), the Loan Originator shall, promptly upon receipt of written instructions from the
Majority Noteholders, either (i) remove such Unqualified Loan (in which case it shall become a
Deleted Loan) from the Trust and substitute one or more Qualified Substitute Loans (in place of a
Deleted Loan) in the manner and subject to the conditions set forth in this Section 3.06 or
(ii) purchase such Unqualified Loan at a purchase price equal to the Repurchase Price with respect
to such Unqualified Loan by depositing or causing to be deposited such Repurchase Price in the
Collection Account.
Any substitution of Loans pursuant to this Section 3.06(a) shall be accompanied by
payment by the Loan Originator of the Substitution Adjustment, if any, (x) if no
Overcollateralization Shortfall exists on the date of such substitution (after giving effect to
such substitution), remitted to the Noteholders in accordance with Section 5.01(c)(4)(i) or
(y) otherwise to be deposited in the Collection Account pursuant to Section 5.01(b) hereof.
(b) As to any Deleted Loan for which the Loan Originator substitutes a Qualified
Substitute Loan or Loans, the Loan Originator shall effect such substitution by delivering to the
Indenture Trustee and the Noteholder Agent a certification executed by a Responsible Officer of the
Loan Originator to the effect that the Substitution Adjustment, if any, has been (x) if no
Overcollateralization Shortfall exists on the date of such substitution (after giving effect to
such substitution), remitted to the Noteholders in accordance with Section 5.01(c)(4)(i),
or (y) otherwise deposited in the Collection Account. As to any Deleted Loan for which the Loan
Originator substitutes a Qualified Substitute Loan or Loans, the Loan Originator shall effect such
substitution by delivering to the Custodian the documents constituting the Custodial Loan File for
such Qualified Substitute Loan or Loans.
The Servicer shall deposit in the Collection Account all payments received in connection with
each Qualified Substitute Loan after the date of such substitution. Monthly Payments received with
respect to Qualified Substitute Loans on or before the date of substitution will be retained by the
Loan Originator. The Trust will be entitled to all payments received on the Deleted Loan on or
before the date of
substitution and the Loan Originator shall thereafter be entitled to retain all amounts
subsequently received in respect of such Deleted Loan. The Loan Originator shall give written
notice to the Issuer, the Servicer (if the Loan Originator is not then acting as such), the
Indenture Trustee and the Noteholder Agent that such substitution has taken place and the Servicer
shall amend the Loan Schedule to reflect (i) the removal of such Deleted Loan from the terms of
this Agreement and (ii) the substitution of the Qualified Substitute Loan. The Servicer shall
promptly deliver to the Issuer, the Loan Originator, the Indenture Trustee and the Noteholder Agent
a copy of the amended Loan Schedule. Upon such substitution, such Qualified Substitute Loan or
Loans shall be subject to the terms of this Agreement in all respects, and the Loan Originator
shall be deemed to have made with respect to such Qualified Substitute Loan or Loans, as of the
date of substitution, the covenants, representations and warranties set forth in Exhibit F
hereto. On the date of such substitution, the Loan Originator will (x) if no Overcollateralization
Shortfall exists as of the date of substitution (after giving effect to such substitution), remit
to the Noteholders as provided in Section 5.01(c)(4)(i) or (y) otherwise deposit into the
Collection Account, in each case an amount equal to the related Substitution Adjustment, if any. In
addition, on the date of such substitution, the Servicer shall cause the Indenture Trustee to
release the Deleted Loan from the Lien of the Indenture and the Servicer will cause each such
Qualified Substitute Loan to be pledged to the Indenture Trustee under the Indenture as part of the
Trust Estate.
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(c) With respect to all Unqualified Loans and other Loans repurchased by the
Loan Originator pursuant to this Agreement, upon the deposit of the Repurchase Price therefor into
the Collection Account or the conveyance of one or more Qualified Substitute Loans and payment of
any Substitution Adjustment, (i) the Issuer shall assign to the Loan Originator, without
representation or warranty, all of the Issuer’s right, title and interest in and to each such
Unqualified Loan or Loan, which right, title and interest were conveyed to the Issuer pursuant to
Section 2.01 hereof and (ii) the Indenture Trustee shall assign to the Loan Originator,
without recourse, representation or warranty, all the Indenture Trustee’s right, title and interest
in and to each such Unqualified Loan or Loan, which right, title and interest were conveyed to the
Indenture Trustee pursuant to Section 2.01 hereof and the Indenture. The Issuer and the
Indenture Trustee shall, at the expense of the Loan Originator, take any actions as shall be
reasonably requested by the Loan Originator to effect the repurchase of any such Loans and to have
the Custodian return the Custodial Loan File of the Deleted Loan to the Servicer.
(d) It is understood and agreed that the obligations of the Loan Originator set
forth in this Section 3.06 to cure, purchase or substitute for an Unqualified Loan
constitute the sole remedies hereunder of the Depositor, the Issuer, the Indenture Trustee, the
Owner Trustee and the Securityholders respecting a breach of the representations and warranties
contained in Section 3.02 hereof and in Exhibit F hereto. Any cause of action
against the Loan Originator relating to or arising out of a defect in a Custodial Loan File or
against the Depositor, the Loan Originator or the Servicer relating to or arising out of a breach
of any representations and warranties made in Sections 3.01, 3.02 or 3.03
hereof, respectively, and in Exhibit F hereto shall accrue as to any Loan upon (i)
discovery of such defect or breach by any party and notice thereof to the Depositor, the Loan
Originator or the Servicer, as applicable, or notice thereof by the Depositor, the Loan Originator
or the Servicer, as applicable, to the Indenture Trustee, (ii) failure by the Depositor, the Loan
Originator or the Servicer, as applicable, to cure such defect or breach or failure by the Loan
Originator to purchase or substitute such Loan as specified above, and (iii) demand upon the Loan
Originator, as applicable, by the Issuer or the Majority Noteholders for all amounts payable in
respect of such Loan.
(e) Neither the Issuer nor the Indenture Trustee shall have any duty to conduct any
affirmative investigation other than as specifically set forth in this
Agreement as to the occurrence of any condition requiring the repurchase or substitution of
any Loan pursuant to this Section or the eligibility of any Loan for purposes of this Agreement.
Section 3.07 Dispositions.
(a) The Majority Noteholders may at any time in their sole discretion, and from time
to time, require that the Issuer redeem all or any portion of the Note Principal Balance of the
Notes by paying the Note Redemption Amount with respect to the Note Principal Balance to be
redeemed in accordance with Section 10.04. In connection with any such redemption, the
Issuer shall effect Dispositions at the direction of the Majority Noteholders in accordance with
this Agreement, including in accordance with this Section 3.07.
(b) (i) In consideration of the consideration received from the Depositor
under the Loan Purchase and Contribution Agreement, the Loan Originator hereby agrees and covenants
that in connection with each Disposition it shall effect the following:
(A) make such representations and warranties concerning the Loans as of the
“cut-off date” of the related Disposition to the Disposition Participants as may be
necessary to effect the Disposition and such additional representations and warranties as
may be necessary, in the reasonable opinion of any of the Disposition Participants, to
effect such Disposition; provided, that, to the extent that the Loan Originator has at
the time of the Disposition actual knowledge of
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any facts or circumstances that would render any of such representations and
warranties materially false, the Loan Originator shall notify the Disposition
Participants of such facts or circumstances and, in such event, shall have no obligation
to make such materially false representation and warranty;
(B) supply such information, opinions of counsel, letters from law and/or
accounting firms and other documentation and certificates regarding the origination of
the Loans as any Disposition Participant shall reasonably request to effect a Disposition
and enter into such indemnification agreements customary for such transaction relating to
or in connection with the Disposition as the Disposition Participants may reasonably
require;
(C) make itself available for and engage in good faith consultation with
the Disposition Participants concerning information to be contained in any document,
agreement, private placement memorandum, or filing with the Securities and Exchange
Commission relating to the Loan Originator or the Loans in connection with a Disposition
and shall use reasonable efforts to compile any information and prepare any reports and
certificates, into a form, whether written or electronic, suitable for inclusion in such
documentation;
(D) to implement the foregoing and to otherwise effect a Disposition, enter
into, or arrange for its Affiliates to enter into insurance and indemnity agreements,
underwriting or placement agreements, servicing agreements, purchase agreements and any
other documentation which may reasonably be required of or reasonably deemed appropriate
by the Disposition Participants in order to effect a Disposition;
(E) to deliver to the applicable Disposition Participants for inclusion in
any prospectus or other offering material any documentation or
information required in connection with Regulation AB, and to provide
indemnification in connection with such information; and
(F) take such further actions as may be reasonably necessary to effect the
foregoing;
provided, that notwithstanding anything to the contrary, (a) the Loan Originator shall have no
liability for the Loans arising from or relating to the ongoing ability of the related Borrowers to
pay under the Loans; (b) none of the indemnities hereunder shall constitute an unconditional
guarantee by the Loan Originator of collectability of the Loans; (c) the Loan Originator shall have
no obligation with respect to the financial inability of any Borrower to pay principal, interest or
other amount owing by such Borrower under a Loan; and (d) the Loan Originator shall only be
required to enter into documentation in connection with Dispositions that is consistent with the
prior public securitizations of affiliates of the Loan Originator, provided that to the extent an
Affiliate of any Noteholder acts as “depositor” or performs a similar function in a Securitization,
additional indemnities and informational representations and warranties are provided which are
consistent with those in the Basic Documents and may upon request of the Loan Originator be set
forth in a separate agreement between such Affiliate of the Noteholder and the Loan Originator.
(ii) In the event of any Disposition to the Loan Originator or any of its
Affiliates (except in connection with a Securitization or a Disposition to a QSPE
Affiliate), the purchase price paid by the Loan Originator or any such Affiliate shall be
the “fair market value” of the Loans subject to such Disposition (as determined by the
Market Value Agent based upon recent sales of comparable loans or such other objective
criteria as may be approved for determining “fair market value” by a “Big Four” national
accounting firm).
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(iii) As long as no Event of Default or Default shall have occurred and
be continuing under this Agreement or the Indenture, the Servicer may continue to service
the Loans included in any Disposition subject to any applicable “term-to-term” servicing
provisions in Section 9.01(b) and subject to any required amendments to the
related servicing provisions as may be necessary to effect the related Disposition
including but not limited to the obligation to make recoverable principal and interest
advances on the Loans.
After the termination of the Revolving Period, the Issuer shall effect one or more
Dispositions at the direction of the Disposition Agent, and the Loan Originator, the Issuer and the
Depositor shall use commercially reasonable efforts to effect a Disposition at the direction of the
Disposition Agent.
(c) The Issuer shall effect Dispositions at the direction of the Majority
Noteholders in accordance with the terms of this Agreement and the Basic Documents. In connection
therewith, the Trust agrees to assist the Loan Originator in such Dispositions and accordingly it
shall, at the request and direction of the Majority Noteholders:
(i) transfer, deliver and sell all or a portion of the Loans as of the
“cut-off dates” of the related Dispositions, to such Disposition Participants as may be
necessary to effect the Dispositions; provided, that any such sale shall be for “fair
market value,” as determined by the Market Value Agent in its reasonable discretion;
(ii) deposit the cash Disposition Proceeds into the Distribution Account
pursuant to Section 5.01(c)(2)(D);
(iii) to the extent that a Securitization creates any Retained Securities,
to accept such Retained Securities as a part of the Disposition Proceeds in accordance
with the terms of this Agreement; and
(iv) take such further actions, including executing and delivering
documents, certificates and agreements, as may be reasonably necessary to effect such
Dispositions.
(d) The Servicer hereby covenants that (i) it will take such actions as may be
reasonably necessary to effect Dispositions as the Disposition Participants may request and direct,
including without limitation providing the Loan Originator such information as may be required to
make representations and warranties required hereunder, (ii) it will make such representations and
warranties regarding its servicing of the Loans hereunder as of the Cut-off Date of the related
Disposition as reasonably required by the Disposition Participants, and (iii) it will deliver to
the applicable Disposition Participants for inclusion in any prospectus or other offering material
any documentation or information required in connection with Regulation AB, and will provide
indemnification in connection with such information.
(e) The Majority Noteholders may effect Whole Loan Sales upon written notice to the
Servicer of its intent to cause the Issuer to effect a Whole Loan Sale at least five (5) Business
Days in advance thereof. The Disposition Agent shall serve as agent for Whole Loan Sales and will
receive a reasonable fee for such services provided that no such fee shall be payable if (i) the
Loan Originator or its Affiliates purchase such Loans, and (ii) no Event of Default or Default
shall have occurred. The Loan Originator or its Affiliates may concurrently bid to purchase Loans
in a Whole Loan Sale; provided, however, that neither the Loan Originator nor any such Affiliates
shall pay a price in excess of the fair market value thereof (as determined by the Market Value
Agent based upon recent sales of comparable loans or such other objective criteria as may be
approved for determining “fair market value” by a “Big
42
Four” national accounting firm). In the event that the Loan Originator does not bid in any
such Whole Loan Sale, it shall have a right of first refusal to purchase the Loans offered for sale
at the price offered by the highest bidder. The Disposition Agent shall conduct any Whole Loan Sale
subject to the Loan Originator’s right of first refusal and shall promptly notify the Loan
Originator of the amount of the highest bid. The Loan Originator shall have five (5) Business Days
following its receipt of such notice to exercise its right of first refusal by notifying the
Disposition Agent in writing.
(f) Except as otherwise expressly set forth under this Section 3.07, the
parties’ rights and obligations under this Section 3.07 shall continue notwithstanding the
occurrence of an Event of Default.
(g) The Disposition Participants (and the Majority Noteholders to the extent
directing the Disposition Participants) shall be independent contractors to the Issuer and shall
have no fiduciary obligations to the Issuer or any of its Affiliates. In that connection, the
Disposition Participants shall not be liable for any error of judgment made in good faith and shall
not be liable with respect to any action they take or omit to take in good faith in the performance
of their duties.
Section 3.08 Loan Originator Put; Servicer Call.
(a) Loan Originator Put. The Loan Originator shall promptly purchase, upon the
written demand of the Majority Noteholders, any Put/Call Loan; provided that the Loan Originator
may (if it is at that time the Servicer), upon receipt of such demand, elect to repurchase such
Put/Call Loan pursuant to (b) below, in which case such repurchase shall be deemed a Servicer Call.
(b) Servicer Call. The Servicer may repurchase any Put/Call Loan at any time. Such
Servicer Calls shall be solely at the option of the Servicer. Prior to exercising a Servicer Call,
the Servicer shall deliver written notice to the Majority Noteholders and the Indenture Trustee
which notice shall identify each Loan to be purchased and the Repurchase Price therefor; provided,
however, that the Servicer may irrevocably waive its right to repurchase any Put/Call Loan as soon
as reasonably practicable following its receipt of notice of the occurrence of any event or events
giving rise to such Loan being a Put/Call Loan.
(c) In connection with each Loan Originator Put, the Loan Originator shall deposit
into the Collection Account the Repurchase Price for the Loans to be repurchased. In connection
with each Servicer Call, the Servicer shall deposit into the Collection Account the Repurchase
Price for the Loans to be purchased. The aggregate Repurchase Price of all Loans transferred
pursuant to Section 3.08(a) as of any date shall in no event exceed the Unfunded Transfer
Obligation at the time of any Loan Originator Put.
Section 3.09 Modification of Underwriting Guidelines.
The Loan Originator shall give the Noteholders prompt written notification of any modification
or change to the Underwriting Guidelines. If the Noteholder Agent objects in writing to any
modification or change to the Underwriting Guidelines within 15 days after receipt of such notice,
no Loans may be conveyed to the Issuer pursuant to this Agreement unless such Loans have been
originated pursuant to the Underwriting Guidelines without giving effect to such modification or
change. Notwithstanding anything contained in this Agreement to the contrary, any Loan conveyed to
the Issuer pursuant to this Agreement pursuant to a modification or change to the Underwriting
Guidelines that has been rejected by the Noteholders or which the Noteholders did not receive
notice of, such Loan shall be deemed an Unqualified Loan and be repurchased or substituted for in
accordance with Section 3.06.
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ARTICLE IV
ADMINISTRATION AND SERVICING OF THE LOANS
Section 4.01 Servicer’s Servicing Obligations.
The Servicer, as independent contract servicer, shall service and administer the Loans in
accordance with the terms and provisions set forth in the Servicing Addendum, which Servicing
Addendum is incorporated herein by reference.
Section 4.02 Financial Statements; Other Statements and Notices.
(a) So long as the Notes remain outstanding, the Servicer (or if the Servicer is not
Option One, the Loan Originator) shall furnish to the Noteholders:
(i) annual consolidated audited financial statements of the Servicer (or
if the Servicer is not Option One, the Loan Originator) and its Affiliates and
Subsidiaries no later than ninety (90) days after the Servicer’s Fiscal Year;
(ii) quarterly unaudited statements of the Servicer (or if the Servicer is
not Option One, the Loan Originator) no later than fifty (50) days after quarter-end;
(iii) monthly unaudited statements of the Servicer (or if the Servicer is
not Option One, the Loan Originator) no later than thirty (30) days after month-end;
(iv) on a timely basis, (i) quarterly and annual consolidating financial
statements reflecting material intercompany adjustments, (ii) all form 10-K, registration
statements and other “corporate finance” filings made with the SEC (other than 8-K
filings), provided, however, that the Servicer (or if the Servicer is not Option One, the
Loan Originator) shall provide the Noteholders a copy of the H&R Block, Inc.’s annual SEC
Form 10-K filing no later than ninety (90) days after year-end, and (iii) any other
financial information that the Noteholders may reasonably request; and
(v) monthly portfolio performance data with respect to the mortgage loans
the Servicer services, including, without limitation, any outstanding delinquencies,
prepayments in whole or in part, and repurchases by the Servicer.
(b) Any and all financial statements set forth in Section 4.02(a)(i)-(iv) above
shall be prepared in accordance with GAAP.
(c) So long as the Notes remain outstanding, the Servicer (or if the Servicer is not
Option One, the Loan Originator) shall furnish to the Noteholders prompt written notice of the
occurrence of any Default, Event of Default or Term Event.
ARTICLE V
ESTABLISHMENT OF TRUST ACCOUNTS; TRANSFER OBLIGATION
Section 5.01 Collection Account and Distribution Account.
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(a) (1) Establishment of Collection Account. The Servicer, for the benefit of the
Noteholders, shall cause to be established and maintained one or more Collection Accounts
(collectively, the “Collection Account”), which shall be separate Eligible Accounts
entitled “Option One Owner Trust 2005-9 Collection Account, Wells Fargo Bank, N.A., as Indenture
Trustee, for the benefit of the Option One Owner Trust 2005-9 Mortgage-Backed Notes.” The
Collection Account shall be maintained with a depository institution and shall satisfy the
requirements set forth in the definition of Eligible Account. Funds in the Collection Account shall
be invested in accordance with Section 5.03 hereof. Net investment earnings shall not be considered
part of funds available in the Collection Account.
(2) Establishment of Distribution Account. The Servicer, for the benefit of the Noteholders,
shall cause to be established and maintained, one or more Distribution Accounts (collectively, the
“Distribution Account”), which shall be separate Eligible Accounts, entitled “Option One
Owner Trust 2005-9 Distribution Account, Wells Fargo Bank, N.A., as Indenture Trustee, for the
benefit of the Option One Owner Trust 2005-9 Mortgage-Backed Notes.” The Distribution Account shall
be maintained with a depository institution and shall satisfy the requirements set forth in the
definition of Eligible Account. Funds in the Distribution Account shall be invested in accordance
with Section 5.03 hereof. The Servicer may, at its option, maintain one account to serve as both
the Distribution Account and the Collection Account, in which case, the account shall be entitled
“Option One Owner Trust 2005-9 Collection/Distribution Account, Wells Fargo Bank, N.A., as
Indenture Trustee, for the benefit of the Option One Owner
Trust 2005-9 Mortgage-Backed Notes.” If the Servicer makes such an election, all references
herein or in any other Basic Document to either the Collection Account or the Distribution Account
shall mean the Collection/Distribution Account described in the preceding sentence.
(3) The Servicer will inform the Indenture Trustee of the location of any accounts held in
the Indenture Trustee’s name, including any location to which an account is transferred.
(b) Deposits to Collection Account. The Servicer shall deposit or cause to be
deposited (without duplication):
(i) all payments on or in respect of each Loan collected on or after the
related Transfer Cut-off Date (net, in each case, of any Servicing Compensation retained
therefrom) within two (2) Business Days after receipt thereof;
(ii) all Net Liquidation Proceeds within two (2) Business Days after
receipt thereof;
(iii) all Mortgage Insurance Proceeds within two (2) Business Days after
receipt thereof;
(iv) all Released Mortgaged Property Proceeds within two (2) Business Days
after receipt thereof;
(v) any amounts payable in connection with the repurchase of any Loan and
the amount of any Substitution Adjustment pursuant to Sections 2.05 and
3.05 hereof concurrently with payment thereof;
(vi) any Repurchase Price payable in connection with a Servicer Call
pursuant to Section 3.08 hereof concurrently with payment thereof;
(vii) the deposit of the Termination Price under Section 10.02 hereof
concurrently with payment thereof;
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(viii) any Nonutilization Fees;
(ix) any payments received under Hedging Instruments (if any) or the return
of amounts by the Hedging Counterparty pledged pursuant to prior Hedge Funding
Requirements in accordance with the last sentence of this Section 5.01(b); and
(x) any Repurchase Price payable in connection with a Loan Originator Put
remitted by the Loan Originator pursuant to Section 3.08(c).
Except as otherwise expressly provided in Section 5.01(c)(4)(i), the Servicer agrees
that it will cause the Loan Originator, Borrower or other appropriate Person paying such amounts,
as the case may be, to remit directly to the Servicer for deposit into the Collection Account all
amounts referenced in clauses (i) through (x) to the extent such amounts are in excess of a Monthly
Payment on the related Loan. To the extent the Servicer receives any such amounts, it will deposit
them into the Collection Account on the same Business Day as receipt thereof.
(c) Withdrawals From Collection Account; Deposits to Distribution Account.
(1) Withdrawals From Collection Account — Reimbursement Items. The Paying Agent shall
periodically but in any event on each Determination Date, make the following withdrawals from the
Collection Account prior to any other withdrawals, in no particular order of priority:
(i) to withdraw any amount not required to be deposited in the Collection
Account or deposited therein in error, including Servicing Compensation;
(ii) to withdraw the Servicing Advance Reimbursement Amount; and
(iii) to clear and terminate the Collection Account in connection with the
termination of this Agreement.
(2) Deposits to Distribution Account — Payment Dates.
(i) On the Business Day prior to each Payment Date, the Paying Agent
shall deposit into the Distribution Account such amounts as are required from the
Transfer Obligation Account pursuant to Sections 5.05(e), 5.05(f),
5.05(g) and 5.05(h).
(ii) After making all withdrawals specified in Section 5.01(c)(1)
above, on each Remittance Date, the Paying Agent (based on information provided by the
Servicer for such Payment Date), shall withdraw the Monthly Remittance Amount (or, with
respect to an additional Payment Date pursuant to Section 5.01(c)(4)(ii), all
amounts on deposit in the Collection Account on such date up to the amount necessary to
make the payments due on the related Payment Date in accordance with Section
5.01(c)(3)) from the Collection Account not later than 5:00 P.M., New York City time
and deposit such amount into the Distribution Account.
(iii) The Servicer shall deposit or cause to be deposited in the
Distribution Account any cash Disposition Proceeds pursuant to Section 3.07. To
the extent the Servicer receives such amounts, it will deposit them into the Distribution
Account on the same Business Day as receipt thereof
(3) Withdrawals From Distribution Account — Payment Dates. On each Payment Date, to the
extent funds are available in the Distribution Account, the Paying Agent (based on the
46
information provided by the Servicer contained in the Servicer’s Remittance Report for such
Payment Date) shall make withdrawals therefrom for application in the following order of priority:
(i) to distribute on such Payment Date the following amounts in the
following order: (a) to the Indenture Trustee, an amount equal to the Indenture Trustee
Fee and all unpaid Indenture Trustee Fees from prior Payment Dates and all amounts owing
to the Indenture Trustee pursuant to Section 6.07 of the Indenture and not paid by the
Servicer or the Depositor up to an amount not to exceed $25,000 per annum, (b) to the
Custodian, an amount equal to the Custodian Fee and all unpaid Custodian Fees from prior
Payment Dates, (c) to the Servicer, (x) an amount equal to the Servicing Compensation
and all unpaid Servicing Compensation from prior Payment Dates (to the extent not
retained from collections or remitted to the Servicer pursuant to Section
5.01(c)) and (y) all Nonrecoverable Servicing Advances not previously reimbursed and
(d) to the Servicer, in trust for the Owner Trustee, an amount equal to the Owner Trustee
Fee and all unpaid Owner Trustee Fees from prior Payment Dates;
(ii) to distribute on such Payment Date the Hedge Funding Requirement (if
any) to the appropriate Hedging Counterparties;
(iii) to the holders of the Notes pro rata, the sum of the Interest Payment
Amount for such Payment Date and the Interest Carry-Forward Amount for the preceding
Payment Date;
(iv) to the holders of the Notes pro rata, the Overcollateralization
Shortfall for such Payment Date; provided, however, that if (a) a Rapid Amortization
Trigger shall have occurred and not been Deemed Cured or (b) an Event of Default under
the Indenture or Default shall have occurred, the holders of the Notes shall receive, in
respect of principal, all remaining amounts on deposit in the Distribution Account;
(v) to the Committed Purchaser, the Nonutilization Fee for such Payment
Date, to the extent payable, together with any Nonutilization Fees unpaid from any prior
Payment Dates;
(vi) to the appropriate Person, amounts in respect of Issuer/Depositor
Indemnities (as defined in the Trust Agreement) and Due Diligence Fees until such amounts
are paid in full;
(vii) to the Transfer Obligation Account, all remaining amounts until the
balance therein equals the Transfer Obligation Target Amount;
(viii) to the Indenture Trustee all amounts owing to the Indenture Trustee
pursuant to Section 6.07 of the Indenture and not paid pursuant to clause (i)(a) above,
including amounts required to be paid to the Indenture Trustee under Section 6.07 of the
Indenture that are in excess of the $25,000 limitation set forth in clause (i)(a) above;
and
(ix) to the holders of the Trust Certificates, subject to Section 5.2(b) of
the Trust Agreement, all amounts remaining therein; provided, however, if the Owner
Trustee has notified the Paying Agent that any amounts are due and owing to it and remain
unpaid, then first to the Owner Trustee, such amounts.
(4) (i) If the Loan Originator or the Servicer, as applicable, repurchases,
purchases or substitutes a Loan pursuant to Section 2.05, 3.06, 3.08(a),
3.08(b) or 3.08(c), then the
47
Noteholders and the Issuer shall deem such date to be an additional Payment Date and the
Issuer shall provide written notice to the Indenture Trustee and the Paying Agent of such
additional Payment Date at least one (1) Business Day prior to such Payment Date. On such
additional Payment Date, the Loan Originator or the Servicer, in satisfaction of its obligations
under Section 2.05, 3.06, 3.08(a) 3.08(b) or 3.08(c) and in
satisfaction of the obligations of the Issuer and the Paying Agent to distribute such amounts to
the
Noteholders pursuant to Section 5.01(c), shall remit to the Noteholders, on behalf of the
Issuer and the Paying Agent, an amount equal to the Repurchase Prices and any Substitution
Adjustments (as applicable) to be paid by the Loan Originator or the Servicer by 12:00 noon New
York City time, as applicable, under such Section, on such Payment Date, and the Note Principal
Balance will be reduced accordingly. Such amounts shall be deemed deposited into the Collection
Account and the Distribution Account, as applicable, and such amounts will be deemed distributed
pursuant to the terms of Section 5.01(c). Upon notice of an additional Payment Date to the
Paying Agent and the Indenture Trustee as provided above, the Paying Agent shall provide the Loan
Originator or the Servicer (as applicable) information necessary so that remittances to the
Noteholders pursuant to this clause (4)(i) may be made by the Loan Originator or the
Servicer, as applicable, in compliance with Section 5.02(a) hereof.
(ii) To the extent that there is deposited in the Collection Account or the
Distribution Account any amounts referenced in Section 5.01(b)(vii) and
5.01(c)(2)(iii), the Majority Noteholders and the Issuer may agree, upon
reasonable written notice to the Paying Agent and the Indenture Trustee, to additional
Payment Dates. The Issuer and the Majority Noteholders shall give the Paying Agent and
the Indenture Trustee at least one (1) Business Day’s written notice prior to such
additional Payment Date and such notice shall specify each amount in Section 5.01(c) to
be withdrawn from the Collection Account and Distribution Account on such day.
(iii) To the extent that there is deposited in the Distribution Account any
amounts referenced in Section 5.05(f), the Majority Noteholders may, in their sole
discretion, establish an additional Payment Date by written notice delivered to the
Paying Agent and the Indenture Trustee at least one Business Day prior to such additional
Payment Date. On such additional Payment Date, the Paying Agent shall pay the sum of the
Overcollateralization Shortfall to the Noteholders in respect of principal on the Notes.
Notwithstanding that the Notes have been paid in full, the Indenture Trustee, the Paying Agent
and the Servicer shall continue to maintain the Distribution Account hereunder until this Agreement
has been terminated.
Section 5.02 Payments to Securityholders.
(a) All distributions made on the Notes on each Payment Date or pursuant to Section
5.04(b) of the Indenture will be made on a pro rata basis among the Noteholders of record of the
Notes on the next preceding Record Date based on the Percentage Interest represented by their
respective Notes, without preference or priority of any kind, and, except as otherwise provided in
the next succeeding sentence, shall be made by wire transfer of immediately available funds to the
account of such Noteholder, if such Noteholder shall own of record Notes having a Percentage
Interest (as defined in the Indenture) of at least 20% and shall have so notified the Paying Agent
and the Indenture Trustee 5 Business Days prior to the related Record Date and otherwise by check
mailed to the address of such Noteholder appearing in the Notes Register. The final distribution on
each Note will be made in like manner, but only upon presentment and surrender of such Note at the
location specified in the notice to Noteholders of such final distribution.
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(b) All distributions made on the Trust Certificates on each Payment Date or
pursuant to Section 5.04(b) of the Indenture will be made in accordance with the Percentage
Interest among the holders of the Trust Certificates of record on the next preceding Record Date
based on their Percentage Interests (as defined in the Trust
Agreement) on the date of distribution, without preference or priority of any kind, and,
except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of
immediately available funds to the account of each such holder, if such holder shall own of record
a Trust Certificate in an original denomination aggregating at least 25% of the Percentage
Interests and shall have so notified the Paying Agent and the Indenture Trustee five (5) Business
Days prior to the related Record Date, and otherwise by check mailed to the address of such
Certificateholder appearing in the Certificate Register. The final distribution on each Trust
Certificate will be made in like manner, but only upon presentment and surrender of such Trust
Certificate at the location specified in the notice to holders of the Trust Certificates of such
final distribution. Any amount distributed to the holders of the Trust Certificates on any Payment
Date shall not be subject to any claim or interest of the Noteholders. In the event that at any
time there shall be more than one Certificateholder, the Indenture Trustee shall be entitled to
reasonable additional compensation from the Servicer for any increases in its obligations
hereunder.
Section 5.03 Trust Accounts; Trust Account Property.
(a) Control of Trust Accounts. Each of the Trust Accounts established hereunder has
been pledged by the Issuer to the Indenture Trustee under the Indenture and shall be subject to the
Lien of the Indenture. Amounts distributed from each Trust Account in accordance with the terms of
this Agreement shall be released for the benefit of the Securityholders from the Trust Estate upon
such distribution thereunder or hereunder. The Indenture Trustee shall possess all right, title and
interest in and to all funds on deposit from time to time in the Trust Accounts and in all proceeds
thereof (including all income thereon) and all such funds, investments, proceeds and income shall
be part of the Trust Account Property and the Trust Estate. If, at any time, any Trust Account
ceases to be an Eligible Account, the Indenture Trustee shall, within ten (10) Business Days (or
such longer period, not to exceed thirty (30) calendar days, with the prior written consent of the
Majority Noteholders) (i) establish a new Trust Account as an Eligible Account, (ii) terminate the
ineligible Trust Account, and (iii) transfer any cash and investments from such ineligible Trust
Account to such new Trust Account.
With respect to the Trust Accounts, the Issuer and the Indenture Trustee agree, that each such
Trust Account shall be subject to the “control” (in accordance with Section 9-104 of the UCC) of
the Indenture Trustee for the benefit of the Noteholders, and, except as may be consented to in
writing by the Majority Noteholders, or provided in the related Blocked Account Agreement, the
Indenture Trustee shall have sole signature and withdrawal authority with respect thereto.
The Servicer (unless it is also the Paying Agent) shall not be entitled to make any
withdrawals or payments from the Trust Accounts.
(b) (1) Investment of Funds. Funds held in the Collection Account and the
Distribution Account and the Transfer Obligation Account may be invested (to the extent practicable
and consistent with any requirements of the Code) in Permitted Investments, as directed by the
Servicer prior to the occurrence of an Event of Default and by the Majority Noteholders thereafter,
in writing or facsimile transmission confirmed in writing by the Servicer or Majority Noteholders,
as applicable. In the event the Indenture Trustee has not received such written direction, such
Funds shall be invested in any Permitted Investment described in clause (i) of the definition of
Permitted Investments. In any case, funds in the Collection Account, the Distribution Account and
the Transfer Obligation Account must be available for withdrawal without penalty, and any Permitted
Investments must mature or otherwise be available for withdrawal, one (1) Business Day prior to the
next Payment Date and shall not be sold or
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disposed of prior to its maturity subject to Subsection (b)(2) of this Section. All interest
and any other investment earnings on amounts or investments held in the Collection Account and the
Distribution Account and the Transfer Obligation Account shall be paid to the Servicer immediately
upon receipt by the Indenture Trustee. All Permitted Investments in which funds in the Collection
Account or the Distribution Account or the Transfer Obligation Account are invested must be held by
or registered in the name of “Wells Fargo Bank, N.A., as Indenture Trustee, in trust for the Option
One Owner Trust 2005-9 Mortgage-Backed Notes.”
(2) Insufficiency and Losses in Trust Accounts. If any amounts are needed for
disbursement from the Collection Account, the Distribution Account or the Transfer Obligation
Account held by or on behalf of the Indenture Trustee and sufficient uninvested funds are not
available to make such disbursement, the Indenture Trustee shall cause to be sold or otherwise
converted to cash a sufficient amount of the investments in the Collection Account or the
Distribution Account or the Transfer Obligation Account, as the case may be. The Indenture Trustee
shall not be liable for any investment loss or other charge resulting therefrom, unless such loss
or charge is caused by the failure of the Indenture Trustee to perform in accordance with written
directions provided pursuant to this Section 5.03.
If any losses are realized in connection with any investment in the Collection Account or the
Distribution Account or the Transfer Obligation Account pursuant to this Agreement during a period
in which the Servicer has the right to direct investments pursuant to Section 5.03(b), then
the Servicer shall deposit the amount of such losses (to the extent not offset by income from other
investments in the Collection Account or the Distribution Account or the Transfer Obligation
Account, as the case may be) into the Collection Account or the Distribution Account or the
Transfer Obligation Account, as the case may be, immediately upon the realization of such loss. All
interest and any other investment earnings on amounts held in the Collection Account and the
Distribution Account and the Transfer Obligation Account shall be taxed to the Issuer and for
federal and state income tax purposes the Issuer shall be deemed to be the owner of the Collection
Account or the Distribution Account or the Transfer Obligation Account, as the case may be.
(c) Subject to Section 6.01 of the Indenture, the Indenture Trustee shall not in any
way be held liable by reason of any insufficiency in any Trust Account held by the Indenture
Trustee resulting from any investment loss on any Permitted Investment included therein.
(d) With respect to the Trust Account Property, the Indenture Trustee acknowledges
and agrees that:
(1) any Trust Account Property that is held in deposit accounts
or securities accounts shall be held solely in the Eligible Accounts, subject
to the last sentence of Subsection (a) of this Section 5.03; and each
such Eligible Account shall be subject to the “control” (in accordance with
Section 9-104 of the UCC) of the Indenture Trustee; and, without limitation on
the foregoing, the Indenture Trustee shall have sole signature authority with
respect thereto;
(2) any Trust Account Property that constitutes Physical
Property shall be delivered to the Indenture Trustee in accordance with
paragraphs (a) and (b) of the definition of “Delivery” in Section 1.01
hereof and shall be held, pending maturity or disposition, solely by the
Indenture Trustee or a securities intermediary (as such term is defined in
Section 8-102(a)(14) of the UCC) acting solely for the Indenture Trustee;
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(3) any Trust Account Property that is a book-entry
security held through the Federal Reserve System pursuant to federal book-entry
regulations shall be delivered in accordance with paragraph (c) of the
definition of “Delivery” in Section 1.01 hereof and shall be maintained
by the Indenture Trustee, pending maturity or disposition, through continued
book-entry registration of such Trust Account Property as described in such
paragraph; and
(4) any Trust Account Property that is an “uncertificated
security” under Article 8 of the UCC and that is not governed by clause (3)
above shall be delivered to the Indenture Trustee in accordance with paragraph
(d) of the definition of “Delivery” in Section 1.01 hereof and shall be
maintained by the Indenture Trustee, pending maturity or disposition, through
continued registration of the Indenture Trustee’s (or its nominee’s) ownership
of such security.
Section 5.04 Advance Account.
(a) The Servicer shall cause to be established and maintained an Advance Account
(the “Advance Account”), with respect to which a Blocked Account Agreement acceptable to
the Purchasers shall be duly executed. The Advance Account shall be a separate Eligible Account.
The Advance Account shall be maintained with a financial institution acceptable to the Purchasers
and shall be maintained for and on behalf of the Purchasers, entitled “Option One Owner Trust
2005-9 Advance Account, Wells Fargo Bank, N.A., as Indenture Trustee, for the benefit of the Option
One Owner Trust 2005-9 Mortgage-Backed Notes.” The Indenture Trustee shall have no monitoring or
calculation obligation with respect to withdrawals from the Advance Account. Amounts in the Advance
Account shall not be invested.
(b) Deposits and Withdrawals. Amounts in respect of the transfer of Additional Note
Principal Balances and Loans shall be deposited into and withdrawn from the Advance Account as
provided in Sections 2.01(c) and 2.06 hereof and Section 3.01 of the Note Purchase
Agreement. Any amounts on deposit in the Advance Account but not applied on any Transfer Date shall
remain in the Advance Account and may be applied to any subsequent transfer of Additional Note
Principal Balances and Loans, subject to the conditions set forth in Section 2.01(c) and
2.06 hereof and Section 3.01(b) of the Note Purchase Agreement. Notwithstanding the
foregoing, in the event that any amounts on deposit in the Advance Account are not applied to a
transfer of Additional Note Principal Balances and Loans on the day in which such amounts were
deposited therein, such amounts shall be returned to the Purchasers by the close of business on
such day.
Section 5.05 Transfer Obligation Account.
(a) The Servicer, for the benefit of the Noteholders, shall cause to be established
and maintained in the name of the Indenture Trustee a Transfer Obligation Account (the
“Transfer Obligation Account”), which shall be a separate Eligible Account and may be
interest-bearing, entitled “Option One Owner Trust 2005-9 Transfer Obligation Account, Wells Fargo
Bank, N.A., as Indenture Trustee, in trust for the Option One Owner Trust 2005-9 Mortgage-Backed
Notes.” The Indenture Trustee shall have no monitoring or calculation obligation with respect to
withdrawals from the Transfer Obligation Account. Amounts in the Transfer Obligation Account shall
be invested in accordance with Section 5.03 hereof.
(b) In accordance with Section 5.06 hereof, the Loan Originator shall
deposit into the Transfer Obligation Account any amounts as may be required thereby.
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(c) On each Payment Date, the Paying Agent will deposit in the Transfer
Obligation Account any amounts required to be deposited therein pursuant to Section
5.01(c)(3)(vii).
(d) On the date of each Disposition, the Paying Agent shall withdraw from the
Transfer Obligation Account such amount on deposit therein in respect of the payment of Transfer
Obligations as may be requested by the Disposition Agent in writing to effect such Disposition.
(e) On each Payment Date, the Paying Agent shall withdraw from the Transfer
Obligation Account and deposit into the Distribution Account on such Payment Date the lesser of (x)
the amount then on deposit in the Transfer Obligation Account and (y) the Interest Carry-Forward
Amount as of such date.
(f) If with respect to any Business Day there exists an Overcollateralization
Shortfall, the Paying Agent, upon the written direction of the Majority Noteholders, shall withdraw
from the Transfer Obligation Account and deposit into the Distribution Account on such Business Day
the lesser of (x) the amount then on deposit in the Transfer Obligation Account and (y) the amount
of such Overcollateralization Shortfall as of such date.
(g) If with respect to any Payment Date there shall exist a Hedge Funding
Requirement, the Paying Agent, upon the written direction of the Servicer or the Majority
Noteholders, shall withdraw from the Transfer Obligation Account and deposit into the Distribution
Account on the Business Day prior to such Payment Date the lesser of (x) the amount then on deposit
in the Transfer Obligation Account (after making all other required withdrawals therefrom with
respect to such Payment Date) and (y) the amount of such Hedge Funding Requirement as of such date.
(h) In the event of the occurrence of an Event of Default under the Indenture, the
Paying Agent shall withdraw all remaining funds from the Transfer Obligation Account and apply such
funds in satisfaction of the Notes as provided in Section 5.04(b) of the Indenture.
(i) The Paying Agent shall return to the Loan Originator all amounts on deposit in
the Transfer Obligation Account (after making all other withdrawals pursuant to this Section
5.05) until the Majority Noteholders provide written notice to the Indenture Trustee (with a
copy to the Loan Originator and the Servicer) of the occurrence of a default or event of default
(however defined) under any Basic Document with respect to the Issuer, the Depositor, the Loan
Originator or any of their Affiliates and (ii) upon the date of the termination of this Agreement
pursuant to Article X, the Paying Agent shall withdraw any remaining amounts from the Transfer
Obligation Account and remit all such amounts to the Loan Originator.
Section 5.06 Transfer Obligation.
(a) In consideration of the transactions contemplated by the Basic Documents, the
Loan Originator agrees and covenants with the Depositor that:
(i) In connection with each Disposition it shall fund, or cause to be
funded, reserve funds, pay credit enhancer fees, pay, or cause to be
paid, underwriting fees, fund any negative difference between the cash Disposition
Proceeds and the aggregate Note Principal Balance at the time of such Disposition, and
make, or cause to be made, such other payments as may be, in the reasonable opinion of
the Disposition Agent, commercially reasonably necessary to effect Dispositions, in each
case to the extent that Disposition Proceeds are insufficient to pay such amounts;
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(ii) In connection with Hedging Instruments (if any), on the Business
Day prior to each Payment Date, it shall deliver to the Servicer for deposit into the
Transfer Obligation Account any Hedge Funding Requirement (to the extent amounts
available on the related Payment Date pursuant to Section 5.01 hereof are
insufficient to make such payment), when, as and if due to any Hedging Counterparty;
(iii) If any Interest Carry-Forward Amount shall occur, it shall deposit
into the Transfer Obligation Account any such Interest Carry-Forward Amount on or before
the Business Day preceding such related Payment Date;
(iv) If on any Business Day, there exists an Overcollateralization
Shortfall, upon the written direction of the Majority Noteholders, it shall, on such
Business Day remit to the Paying Agent for deposit into the Transfer Obligation Account
the full amount of the Overcollateralization Shortfall as of such date, provided, that in
the event that notice of such Overcollateralization Shortfall is provided to the Loan
Originator after 4:30 p.m. New York City time, the Loan Originator shall make such
deposit on the following Business Day;
(v) If on any applicable Payment Date, the amount available in the
Distribution Account to pay the Nonutilization Fee is insufficient, the Loan Originator
shall deposit into the Transfer Obligation Account the amount of such shortfall on the
Business Day prior to such Payment Date;
(vi) If the amount available to pay the Indemnified Party against any Losses
(as such terms are defined in the Note Purchase Agreement) is insufficient, the Loan
Originator shall promptly deposit the amount of such shortfall; and
(vii) Notwithstanding anything to the contrary herein, in the event of the
occurrence of an Event of Default under the Indenture, the Loan Originator shall promptly
deposit into the Transfer Obligation Account the entire amount of the Unfunded Transfer
Obligation;
provided, that notwithstanding anything to the contrary contained herein, the Loan Originator’s
cumulative payments under or in respect of the Transfer Obligations (after subtracting therefrom
any amounts returned to the Loan Originator pursuant to Section 5.05(i)(i)), together with
the Loan Originator’s payments in respect of any Loan Originator Puts, shall not in the aggregate
exceed the Unfunded Transfer Obligation.
(b) The Loan Originator agrees that the Noteholders, as ultimate assignee of the
rights of the Depositor under this Agreement and the other Basic Documents, may enforce the rights
of the Depositor directly against the Loan Originator.
ARTICLE VI
STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS
STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS
Section 6.01 Statements.
(a) No later than 12:00 noon (New York City time) on each Remittance Date, the
Servicer shall deliver to the Indenture Trustee and the Noteholders by electronic transmission, the
receipt and legibility of which shall be confirmed by telephone, and with hard copy thereof to be
delivered no later than one (1) Business Day after such Remittance Date, the Servicer’s Remittance
Report, setting forth the date of such Report (day, month and year), the name of the Issuer (i.e.,
“Option One Owner
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Trust 2005-9”), and the date of this Agreement, all in substantially the form set out in
Exhibit B hereto. Furthermore, on each Remittance Date, the Servicer shall deliver to the
Indenture Trustee and the Noteholders a data file providing, with respect to each Loan in the Loan
Pool as of the last day of the related Remittance Period (i) if such Loan is an ARM, the current
Loan Interest Rate; (ii) the Principal Balance with respect to such Loan; (iii) the date of the
last Monthly Payment paid in full; and (iv) such other information as may be reasonably requested
by the Noteholder Agent and the Indenture Trustee. In addition, no later than 12:00 noon (New York
City time) on the fifteenth (15th) day of each calendar month (or if such day is not a
Business Day, the preceding Business Day), the Custodian shall prepare and provide to the Servicer
and the Indenture Trustee by facsimile, the Custodian Fee Notice for the Payment Date falling in
such calendar month.
(b) No later than 12:00 noon (New York City time) on each Remittance Date, the
Servicer shall prepare (or cause to be prepared) and provide to the Indenture Trustee
electronically, receipt confirmed by telephone, and each Noteholder, a statement (the “Payment
Statement”), stating each date and amount of a purchase of Additional Note Principal Balance
(day, month and year), the name of the Issuer (i.e., “Option One Owner Trust 2005-9”), the date of
this Agreement, restating all of the information set forth in the Loan Schedule for all Loans as of
such Remittance Date and the following information:
(1) the aggregate amount of collections in respect of principal of the
Loans received by the Servicer during the preceding Remittance Period;
(2) the aggregate amount of collections in respect of interest on the
Loans received by the Servicer during the preceding Remittance Period;
(3) all Mortgage Insurance Proceeds received by the Servicer during the
preceding Remittance Period and not required to be applied to restoration or repair of
the related Mortgaged Property or returned to the Borrower under applicable law or
pursuant to the terms of the applicable Mortgage Insurance Policy;
(4) all Net Liquidation Proceeds deposited by the Servicer into the
Collection Account during the preceding Remittance Period;
(5) all Released Mortgaged Property Proceeds deposited by the Servicer
into the Collection Account during the preceding Remittance Period;
(6) the aggregate amount of all Servicing Advances made by the Servicer
during the preceding Remittance Period;
(7) the aggregate of all amounts deposited into the Distribution Account
in respect of the repurchase of Unqualified Loans and the repurchase of Loans pursuant to
Section 2.05 hereof during the preceding Remittance Period;
(8) the aggregate Principal Balance of all Loans for which a Servicer Call
was exercised during the preceding Remittance Period;
(9) the aggregate Principal Balance of all Loans for which a Loan
Originator Put was exercised during the preceding Remittance Period;
(10) the aggregate amount of all payments received under Hedging Instruments
(if any) during the preceding Remittance Period
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(11) the aggregate amount of all withdrawals from the Distribution
Account pursuant to Section 5.01(c)(1)(i) hereof during the preceding Remittance
Period;
(12) the aggregate amount of cash Disposition Proceeds received during the
preceding Remittance Period;
(13) withdrawals from the Collection Account in respect of the Servicing
Advance Reimbursement Amount with respect to the related Payment Date;
(14) the number and aggregate Principal Balance of all Loans that are (i)
30-59 days Delinquent, (ii) 60-89 days Delinquent, (iii) 90 or more days Delinquent as of
the end of the related Remittance Period;
(15) the aggregate amount of Liquidated Loan Losses incurred (i) during the
preceding Remittance Period, and (ii) during the preceding three Remittance Periods;
(16) the aggregate of the Principal Balances of all Loans in the Loan Pool as
of the end of the related Remittance Period;
(17) the aggregate amount of all deposits into the Distribution Account from
the Transfer Obligation Account pursuant to Sections 5.05(e), 5.05(f),
5.05(g), and 5.05(h) on the related Payment Date;
(18) the aggregate amount of distributions in respect of Servicing
Compensation to the Servicer, and unpaid Servicing Compensation from prior Payment Dates
for the related Payment Date;
(19) the aggregate amount of distributions in respect of Indenture Trustee
Fees and unpaid Indenture Trustee Fees from prior Payment Dates for the related Payment
Date;
(20) the aggregate amount of distributions in respect of the Custodian Fee
and unpaid Custodian Fees from prior Payment Dates for the related Payment Date;
(21) the aggregate amount of distributions in respect of the Owner Trustee
Fees and unpaid Owner Trustee Fees from prior Payment Dates and for the related Payment
Date;
(22) the Unfunded Transfer Obligation and Overcollateralization Shortfall on
such Payment Date for the related Payment Date;
(23) the aggregate amount of distributions in respect of Trust/Depositor
Indemnities for the related Payment Date;
(24) the aggregate amount of distributions to the Transfer Obligation Account
for the related Payment Date;
(25) the aggregate amount of distributions to the holders of the Trust
Certificates for the related Payment Date;
(26) the Note Principal Balance of the Notes as of the last day of the
related Remittance Period (without taking into account any Additional Note Principal
Balance between
55
the last day of such Remittance Period and the related Payment Date) before and
after giving effect to distributions made to the holders of the Notes for such Payment
Date;
(27) the Pool Principal Balance as of the end of the preceding Remittance
Period; and
(28) whether a Rapid Amortization Trigger exists with respect to such Payment
Date.
Such Payment Statement shall also be provided on the Remittance Date to the Noteholders and
Indenture Trustee in the form of a data file mutually agreed to by and between the Noteholders, the
Indenture Trustee and the Servicer. The Indenture Trustee shall have no duty to monitor the
occurrence of a Rapid Amortization Trigger or any events resulting in withdrawals from the Transfer
Obligation Account.
(c) Within fifty (50) days of the end of each financial quarter, each of the Loan
Originator and the Servicer shall prepare and deliver to the Noteholder Agent a quarterly
compliance certificate and report in the form of Exhibit I attached hereto.
Section 6.02 Specification of Certain Tax Matters.
The Paying Agent shall comply with all requirements of the Code and applicable state and local
law with respect to the withholding from any distributions made to any Securityholder of any
applicable withholding taxes imposed thereon and with respect to any applicable reporting
requirements in connection therewith, giving due effect to any applicable exemptions from such
withholding and effective certifications or forms provided by the recipient. Any amounts withheld
pursuant to this Section 6.02 shall be deemed to have been distributed to the Securityholders, as
the case may be, for all purposes of this Agreement. The Indenture Trustee shall have no
responsibility for preparing or filing any tax returns.
Section 6.03 Valuation of Loans; Hedge Value and Retained Securities Value, Market
Value Agent.
(a) The Noteholders hereby irrevocably appoint, and the Issuer hereby consents to
the appointment of, the Market Value Agent as agent on behalf of the Noteholders to determine the
Market Value of each Loan, the Hedge Value of each Hedging Instrument (if any) and the Retained
Securities Value of all Retained Securities.
(b) Except as otherwise set forth in Section 3.07 hereof, on each Business
Day, the Market Value Agent shall determine the Market Value of each Loan, for purposes of the
Basic Documents, in its sole discretion, exercised in good faith. In determining the Market Value
of each Loan, the Market Value Agent may consider any information that it may deem relevant,
including, without limitation, the expected proceeds of the sale of such Loan following the
occurrence and continuation of an Event of Default. The Market Value Agent’s determination, in its
sole discretion exercised in good faith, of Market Value shall be conclusive and binding upon the
parties hereto, absent manifest error (including without limitation, any error contemplated in
Section 2.08).
(c) On each Business Day, the Market Value Agent shall determine in its sole
judgment the Hedge Value of each Hedging Instrument as of such Business Day. In making such
determination the Market Value Agent may rely exclusively on quotations provided by the Hedging
Counterparty, by leading dealers in instruments similar to such Hedging Instrument, which leading
56
dealers may include the Market Value Agent and its Affiliates and such other sources of
information as the Market Value Agent may deem appropriate.
(d) On each Business Day, the Market Value Agent shall determine in its sole
judgment the Retained Securities Value of the Retained Securities, if any, expected to be issued
pursuant to such Securitization as of the closing date of such Securitization. In making such
determination the Market Value Agent may rely exclusively on quotations provided by leading dealers
in instruments similar to such Retained Securities, which leading dealers may include the Market
Value Agent and its Affiliates and such other sources of information as the Market Value Agent may
deem appropriate.
ARTICLE VII
HEDGING; FINANCIAL COVENANTS
Section 7.01 Hedging Instruments.
(a) From time to time, the Trust shall enter into such Hedging Instruments as the
Market Value Agent, on behalf of the Noteholders, may determine are necessary in order to hedge the
interest rate risk with respect to the Collateral; provided that each such Hedging Instrument shall
conform to the requirements of Section 7.01(b), (c), and (d), as determined
by the Market Value Agent in its sole discretion, exercised in good faith.
(b) Each Hedging Instrument shall expressly provide that in the event of a
Disposition or other removal of the Loan from the Trust, such portion of the Hedging Instrument
shall terminate as the Disposition Agent deems appropriate to facilitate the hedging of the risks
specified in Section 7.01(a). In the event that the Hedging Instrument is not otherwise
terminated, it shall contain provisions that allow the position of the Trust to be assumed by an
Affiliate of the Trust upon the liquidation of the Trust. The terms of the assignment documentation
and the credit quality of the successor to the Trust shall be subject to the Hedging Counterparty’s
approval.
(c) Any Hedging Instrument that provides for any payment obligation on the part of
the Issuer must (i) be without recourse to the assets of the Issuer, (ii) contain a non-petition
covenant provision in the form of Section 11.13, (iii) limit payment dates thereunder to
Payment Dates and (iv) contain a provision limiting any cash payments due on any day under such
Hedging Instrument solely to funds available therefor in the Collection Account on such day
pursuant to Section 5.01(c)(3)(ii) hereof and funds available therefor in the Transfer
Obligation Account.
(d) Each Hedging Instrument must (i) provide for the direct payment of any amounts
thereunder to the Collection Account pursuant to Section 5.01(b)(ix), (ii) contain an
assignment of all of the Issuer’s rights (but none of its obligations) under such Hedging
Instrument to the Indenture Trustee and shall include an express consent to the Hedging
Counterparty to such assignment, (iii) provide that in the event of the occurrence of an Event of
Default, such Hedging Instrument shall terminate upon the direction of the Majority Noteholders,
(iv) prohibit the Hedging Counterparty from “setting-off” or “netting” other obligations of the
Issuer or its Affiliates against such Hedging Counterparty’s payment obligations thereunder, (v)
provide that the appropriate portion of the Hedging Instrument will terminate upon the removal of
the related Loans from the Trust Estate and (vi) have economic terms that are fixed and not subject
to alteration after the date of assumption or execution.
(e) If agreed to by the Majority Noteholders, the Issuer may pledge its assets in
order to secure its obligations in respect of Hedge Funding Requirements (if any), provided that
such right shall
57
be limited solely to Hedging Instruments for which an Affiliate of the Noteholder Agent is a
Hedging Counterparty.
(f) The aggregate notional amount of all Hedging Instruments shall not exceed the
Note Principal Balance as of the date on which each Hedging Instrument is entered into by the
Issuer and a Hedging Counterparty.
Section 7.02 Financial Covenants. For so long as the Notes are outstanding, each
of the Loan Originator and the Servicer shall comply with the following financial covenants
(collectively, the “Financial Covenants”):
(a) Each of the Loan Originator and the Servicer shall maintain a minimum Tangible
Net Worth of $425 million as of any day;
(b) Each of the Loan Originator and the Servicer shall maintain a ratio of Tangible
Net Worth to Total Required Capital of 1:1 or greater at any time;
(c) Neither the Loan Originator nor the Servicer shall exceed a maximum
non-warehouse leverage ratio (the ratio of (i) the sum of (A) all funded debt (excluding debt from
H&R Block, Inc. or any of its Affiliates and all non-recourse debt) less (B) 91% of its mortgage
loan inventory held for sale less (C) 90% of servicing advance receivables (determined and valued
in accordance with GAAP) to (ii) Tangible Net Worth) of 1:2 at any time;
(d) Each of the Loan Originator and the Servicer shall maintain a minimum liquidity
facility (defined as a committed, unsecured, non-amortizing liquidity facility from H&R Block not
to mature (scheduled or accelerated) prior to the Maturity Date) in an amount no less than $150
million. Such facility from H&R Block cannot contain covenants or termination events more
restrictive than the covenants or termination events contained in the Basic Documents; and
(e) Each of the Loan Originator and the Servicer shall not permit “Net Income”
(defined and determined in accordance with GAAP), for any quarter, together with the three
preceding, consecutive fiscal quarters commencing with the quarter ending October 31, 2005, to be
less than $1.
ARTICLE VIII
THE SERVICER
Section 8.01 Indemnification, Third Party Claims.
(a) The Servicer shall indemnify the Loan Originator, the Owner Trustee, the Trust,
the Depositor, the Indenture Trustee and the Noteholders, their respective officers, directors,
employees, agents and “control persons,” as such term is used under the Act and under the
Securities Exchange Act of 1934 as amended (each a “Servicer Indemnified Party”) and hold
harmless each of them against any and all claims, losses, damages, penalties, fines, forfeitures,
reasonable legal fees and related costs, judgments, and other costs and expenses resulting from any
claim, demand, defense or assertion based on or grounded upon, or resulting from, a breach of any
of the Servicer’s representations and warranties and covenants contained in this Agreement or in
any way relating to the failure of the Servicer to perform its duties and service the Loans in
compliance with the terms of this Agreement except to the extent such loss arises out of such
Servicer Indemnified Party’s gross negligence or willful misconduct; provided, however, that if the
Servicer is not liable pursuant to the provisions of Section 8.01(b) hereof for its failure
to perform its duties and service the Loans in compliance with the terms of this Agreement, then
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the provisions of this Section 8.01 shall have no force and effect with respect to
such failure. The provisions of this indemnity shall run directly to and be enforceable by a
Servicer Indemnified Party subject to the limitations hereof.
(b) None of the Loan Originator, the Depositor or the Servicer or any of their
respective Affiliates, directors, officers, employees or agents shall be under any liability to the
Owner Trustee, the Issuer, the Indenture Trustee or the Securityholders for any action taken, or
for refraining from the taking of any action, in good faith pursuant to this Agreement, or for
errors in judgment; provided, however, that this provision shall not protect the Loan Originator,
the Depositor, the Servicer or any of their respective Affiliates, directors, officers, employees,
agents against the remedies provided herein for the breach of any warranties, representations or
covenants made herein, or against any expense or liability specifically required to be borne by
such party without right of reimbursement pursuant to the terms hereof, or against any expense or
liability which would otherwise be imposed by reason of misfeasance, bad faith or negligence in the
performance of the respective duties of the Servicer, the Depositor or the Loan Originator, as the
case may be. The Loan Originator, the Depositor, the Servicer and any of their respective
Affiliates, directors, officers, employees, agents may rely in good faith on any document of any
kind which, prima facie, is properly executed and submitted by any Person respecting any matters
arising hereunder.
(c) The Loan Originator agrees to indemnify and hold harmless the Depositor and the
Noteholders, as the ultimate assignees from the Depositor (each an “Originator Indemnified
Party,” together with the Servicer Indemnified Parties, the “Indemnified Parties”),
from and against any loss, liability, expense, damage, claim or injury arising out of or based on
(i) any breach of any representation, warranty or covenant of the Loan Originator, the Servicer or
their Affiliates, in any Basic Document, including, without limitation, the origination or prior
servicing of the Loans by reason of any acts, omissions, or alleged acts or omissions arising out
of activities of the Loan
Originator, the Servicer or their Affiliates, and (ii) any untrue statement by the Loan
Originator, the Servicer or its Affiliates of any material fact or any such Person’s failure to
state a material fact necessary to make such statements not misleading with respect to any such
Person’s statements contained in any Basic Document, including, without limitation, any Officer’s
Certificate, statement, report or other document or information prepared by any such Person and
furnished or to be furnished by it pursuant to or in connection with the transactions contemplated
thereby and not corrected prior to completion of the relevant transaction including, without
limitation, such written information as may have been and may be furnished in connection with any
due diligence investigation with respect to the Loans or any such Person’s business, operations or
financial condition, including reasonable attorneys’ fees and other costs or expenses incurred in
connection with the defense of any actual or threatened action, proceeding or claim; provided that
the Loan Originator shall not indemnify an Originator Indemnified Party to the extent such loss,
liability, expense, damage or injury is due to either an Originator Indemnified Party’s willful
misconduct, bad faith or gross negligence or by reason of an Originator Indemnified Party’s
reckless disregard of its obligations hereunder; provided, further, that the Loan Originator shall
not be so required to indemnify an Originator Indemnified Party or to otherwise be liable hereunder
or under any provision of the Basic Documents to an Originator Indemnified Party for any losses in
respect of the performance of the Loans, the insolvency, bankruptcy, delinquency, creditworthiness
and similar characteristics of the Borrowers under the Loans, the uncollectability of any
principal, interest, and any other charges (including late fees) under such loans, changes in the
market value of the Loans or other similar investment risks associated with the Loans arising from
a breach of any representation or warranty set forth in Exhibit F hereto, the sole remedy
for the breach of which is provided in Section 3.06 hereof. The provisions of this
indemnity shall run directly to and be enforceable by an Originator Indemnified Party subject to
the limitations hereof.
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(d) With respect to a claim subject to indemnity hereunder made by any Person
against an Indemnified Party (a “Third Party Claim”), such Indemnified Party shall notify
the related indemnifying parties (each an “Indemnifying Party”) in writing of the Third
Party Claim within a reasonable time after receipt by such Indemnified Party of written notice of
the Third Party Claim unless the Indemnifying Parties shall have previously obtained actual
knowledge thereof. Thereafter, the Indemnified Party shall deliver to the Indemnifying Parties,
within a reasonable time after the Indemnified Party’s receipt thereof, copies of all notices and
documents (including court papers) received by the Indemnified Party relating to the Third Party
Claim. No failure to give such notice or deliver such documents shall effect the rights to
indemnity hereunder. Each Indemnifying Party shall promptly notify the Indenture Trustee and the
Indemnified Party (if other than the Indenture Trustee) of any claim of which it has been notified
and shall promptly notify the Indenture Trustee and the Indemnified Party (if applicable) of its
intended course of action with respect to any claim.
(e) If a Third Party Claim is made against an Indemnified Party, while maintaining
control over its own defense, the Indemnified Party shall cooperate and consult fully with the
Indemnifying Party in preparing such defense, and the Indemnified Party may defend the same in such
manner as it may deem appropriate, including settling such claim or litigation after giving notice
to the Indemnifying Party of such terms and the Indemnifying Party will promptly reimburse the
Indemnified Party upon written request; provided, however, that the Indemnified Party may not
settle any claim or litigation without the consent of the Indemnifying Party; provided, further,
that the Indemnifying Party shall have the right to reject the selection of counsel by the
Indemnified Party if the Indemnifying Party reasonably determines that such counsel is
inappropriate in light of the nature of the claim or litigation and shall have the right to
assume the defense of such claim or litigation if the Indemnifying Party determines that the
manner of defense of such claim or litigation is unreasonable.
Section 8.02 Merger or Consolidation of the Servicer.
The Servicer shall keep in full effect its existence, rights and franchises as a corporation,
and will obtain and preserve its qualification to do business as a foreign corporation and maintain
such other licenses and permits in each jurisdiction necessary to protect the validity and
enforceability of each Basic Document to which it is a party and each of the Loans and to perform
its duties under each Basic Document to which it is a party; provided, however, that the Servicer
may merge or consolidate with any other corporation upon the satisfaction of the conditions set
forth in the following paragraph.
Subject to the prior written consent of the Majority Noteholders, any Person into which the
Servicer may be merged or consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer shall be a party, or any Person succeeding to the business of
the Servicer, shall be an Eligible Servicer and shall be the successor of the Servicer, as
applicable hereunder, without the execution or filing of any paper or any further act on the part
of any of the parties hereto, anything herein to the contrary notwithstanding. The Servicer shall
send notice of any such merger, conversion, consolidation or succession to the Indenture Trustee
and the Issuer.
Section 8.03 Limitation on Liability of the Servicer and Others.
The Servicer and any director, officer, employee or agent of the Servicer may rely on any
document of any kind which it in good faith reasonably believes to be genuine and to have been
adopted or signed by the proper authorities respecting any matters arising hereunder. Subject to
the terms of Section 8.01 hereof, the Servicer shall have no obligation to appear with respect to,
prosecute or defend any legal action which is not incidental to the Servicer’s duty to service the
Loans in accordance with this Agreement.
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Section 8.04 Servicer Not to Resign; Assignment.
The Servicer shall not resign from the obligations and duties hereby imposed on it except (a)
with the consent of the Majority Noteholders or (b) upon determination that its duties hereunder
are no longer permissible under applicable law. Any such determination pursuant to clause (b) of
the preceding sentence permitting the resignation of the Servicer shall be evidenced by an
Independent opinion of counsel to such effect delivered (at the expense of the Servicer) to the
Indenture Trustee and the Majority Noteholders. No resignation of the Servicer shall become
effective until a successor servicer, appointed pursuant to the provisions of Section 9.02
hereof shall have assumed the Servicer’s responsibilities, duties, liabilities (other than those
liabilities arising prior to the appointment of such successor) and obligations under this
Agreement.
Except as expressly provided herein, the Servicer shall not assign or transfer any of its
rights, benefits or privileges hereunder to any other Person, or delegate to or subcontract with,
or authorize or appoint any other Person to perform any of the duties, covenants or obligations to
be performed by the Servicer hereunder and any agreement, instrument or act purporting to effect
any such assignment, transfer, delegation or appointment shall be void.
The Servicer agrees to cooperate with any successor Servicer in effecting the transfer of the
Servicer’s servicing responsibilities and rights hereunder pursuant to the first paragraph of this
Section 8.04, including, without limitation, the transfer to such successor of all relevant
records and documents (including any Loan Files in the possession of the Servicer) and all amounts
received with respect to the Loans and not otherwise permitted to be retained by the Servicer
pursuant to this Agreement. In addition, the Servicer, at its sole cost and expense, shall prepare,
execute and deliver any and all documents and instruments to the successor Servicer including all
Loan Files in its possession and do or accomplish all other acts necessary or appropriate to effect
such termination and transfer of servicing responsibilities.
Section 8.05 Relationship of Servicer to Issuer and the Indenture Trustee.
The relationship of the Servicer (and of any successor to the Servicer as servicer under this
Agreement) to the Issuer, the Owner Trustee and the Indenture Trustee under this Agreement is
intended by the parties hereto to be that of an independent contractor and not of a joint venturer,
agent or partner of the Issuer, the Owner Trustee or the Indenture Trustee.
Section 8.06 Servicer May Own Securities.
Each of the Servicer and any Affiliate of the Servicer may in its individual or any other
capacity become the owner or pledgee of Securities with the same rights as it would have if it were
not the Servicer or an Affiliate thereof except as otherwise specifically provided herein;
provided, however, that at any time that Option One or any of its Affiliates is the Servicer,
neither the Servicer nor any of its Affiliates (other than an Affiliate which is a corporation
whose purpose is limited to holding securities and related activities and which cannot incur
recourse debt) may be a Noteholder. Securities so owned by or pledged to the Servicer or such
Affiliate shall have an equal and proportionate benefit under the provisions of this Agreement,
without preference, priority, or distinction as among all of the Securities; provided, however,
that any Securities owned by the Servicer or any Affiliate thereof, during the time such Securities
are owned by them, shall be without voting rights for any purpose set forth in this Agreement
unless the Servicer or such Affiliate owns all outstanding Securities of the related class. The
Servicer shall notify the Indenture Trustee promptly after it or any of its Affiliates becomes the
owner or pledgee of a Security.
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Section 8.07 Indemnification of the Indenture Trustee, Noteholders and Noteholder
Agent.
The Servicer agrees to indemnify the Indenture Trustee and its employees, officers, directors
and agents, and reimburse its reasonable out-of-pocket expenses in accordance with Section
6.07 of the Indenture as if it was a signatory thereto. The Servicer agrees to indemnify the
Noteholders and the Noteholder Agent in accordance with Section 9.01 of the Note Purchase
Agreement as if it were signatory thereto.
ARTICLE IX
SERVICER EVENTS OF DEFAULT
Section 9.01 Servicer Events of Default.
(a) In case one or more of the following Servicer Events of Default by the Servicer
shall occur and be continuing, that is to say:
(1) any failure by the Servicer to deposit into the Collection Account or
the Distribution Account any amounts required to be deposited therein or any failure by
the Servicer to make any of the required payments therefrom in accordance with
Section 5.01 hereof; or
(2) any failure on the part of the Servicer duly to observe or perform in
any material respect any other of the material covenants or agreements on the part of the
Servicer, contained in any Basic Document to which it is a party, which continues
unremedied for a period of thirty (30) days (or, in the case of payment of insurance
premiums, for a period of fifteen (15) days) after the date on which written notice of
such failure, requiring the same to be remedied, shall have been given to the Servicer by
any other party hereto or to the Servicer (with copy to each other party hereto), by
Holders of 25% of the Percentage Interests of the Notes or the Trust Certificates; or
(3) any breach on the part of the Servicer of any representation or
warranty contained in any Basic Document to which it is a party that materially and
adversely affects the interests of any of the parties hereto or any Securityholder and
which continues unremedied for a period of thirty (30) days after the date on which
notice of such breach, requiring the same to be remedied, shall have been given to the
Servicer by any other party hereto or to the Servicer (with copy to each other party
hereto), by the Noteholder Agent or Holders of 25% of the Percentage Interests (as
defined in the Indenture) of the Notes; or
(4) there shall have been commenced before a court or agency or
supervisory authority having jurisdiction in the premises an involuntary proceeding
against the Servicer under any present or future federal or state bankruptcy, insolvency
or similar law for the appointment of a conservator, receiver, liquidator, trustee or
similar official in any bankruptcy, insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings, or for the winding-up or liquidation of
its affairs, which action shall not have been dismissed for a period of sixty (60) days;
or
(5) the Servicer shall consent to the appointment of a conservator,
receiver, liquidator, trustee or similar official in any bankruptcy, insolvency,
readjustment of debt, marshaling of assets and liabilities or similar proceedings of or
relating to it or of or relating to all or substantially all of its property; or
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(6) the Servicer (or the Loan Originator if the Servicer is not
Option One) fails to comply with the Financial Covenants; or
(7) a Change in Control of the Servicer without prior written consent of
the Noteholders or the Servicer otherwise ceases to be a 100% direct or indirect
wholly-owned subsidiary of H&R Block Inc.; or
(8) the Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any applicable
bankruptcy, insolvency or reorganization statute, make an assignment for the benefit of
its creditors, voluntarily suspend payment of its obligations, or take any corporate
action in furtherance of the foregoing.
Then, and in each and every such case, so long as a Servicer Event of Default shall not have been
remedied, the Indenture Trustee or the Majority Noteholders, by notice in
writing to the Servicer may, in addition to whatever rights such Person may have at law or in
equity to damages, including injunctive relief and specific performance, may terminate all the
rights and obligations of the Servicer under this Agreement and in and to the Loans and the
proceeds thereof, as servicer under this Agreement. Upon receipt by the Servicer of such written
notice, all authority and power of the Servicer under this Agreement, whether with respect to the
Loans or otherwise, shall, subject to Section 9.02 hereof, pass to and be vested in a
successor servicer, and the successor servicer is hereby authorized and empowered to execute and
deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and
other instruments and do or cause to be done all other acts or things necessary or appropriate to
effect the purposes of such notice of termination, including, but not limited to, the transfer and
endorsement or assignment of the Loans and related documents. The Servicer agrees to cooperate with
the successor servicer in effecting the termination of the Servicer’s responsibilities and rights
hereunder, including, without limitation, the transfer to the successor servicer for administration
by it of all amounts which shall at the time be credited by the Servicer to each Collection Account
or thereafter received with respect to the Loans.
(b) Upon the occurrence of (i) an Event of Default or Default under any of the Basic
Documents, (ii) a Servicer Event of Default under this Agreement, (iii) a Rapid Amortization
Trigger, or (iv) an event that shall have a reasonable possibility of materially impairing the
ability of the Servicer to service and administer the Loans in accordance with the terms and
provisions set forth in the Basic Documents (each, a “Term Event”), the Servicer’s right to
service the Loans pursuant to the terms of this Agreement shall be in effect for an initial period
commencing on the date on which such Term Event occurred and shall automatically terminate at 5:00
p.m., New York City time, on the last Business Day of the calendar month in which such Term Event
occurred (the “Initial Term”). Thereafter, the Initial Term shall be extendible in the sole
discretion of the Majority Noteholders by written notice (each, a “Servicer Extension
Notice”) of the Majority Noteholders for successive one-month terms (each such term ending at
5:00 p.m., New York City time, on the last business day of the related month). Following a Term
Event, the Servicer hereby agrees that the Servicer shall be bound for the duration of the Initial
Term and the term covered by any such Servicer Extension Notice to act as the Servicer pursuant to
this Agreement. Following a Term Event, the Servicer agrees that if, as of 3:00 p.m. (New York City
time) on the last Business Day of any month, the Servicer shall not have received a Servicer
Extension Notice from the Majority Noteholders, the Servicer shall give written notice of such
non-receipt to the Noteholders by 4:00 p.m. (New York City time). Following a Term Event, the
failure of the Majority Noteholders to deliver a Servicer Extension Notice by 5:00 p.m. (New York
City time) shall result in the automatic and immediate termination of the Servicer (the
“Termination Date”). Notwithstanding these time frames, the Servicer and the Noteholders
shall comply with all applicable laws in connection with such transfer and the Servicer shall
continue to service the Loans until completion of such transfer.
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Section 9.02 Appointment of Successor.
On and after the date the Servicer receives a notice of termination pursuant to Section 9.01
hereof or is automatically terminated pursuant to Section 9.01(b) hereof, or the Owner Trustee
receives the resignation of the Servicer evidenced by an Opinion of Counsel or accompanied by the
consents required by Section 8.04 hereof, or the Servicer is removed as servicer pursuant
to this Article IX or Section 4.01 of the Servicing Addendum, then, the Majority Noteholders shall
appoint a successor servicer to be the successor in all respects to the Servicer in its capacity as
Servicer under this Agreement and the transactions set forth or provided for herein and shall be
subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer
by the terms and provisions hereof, provided, however, that the successor servicer shall not be
liable for any actions of any servicer prior to it.
The successor servicer shall be obligated to make Servicing Advances hereunder. As
compensation therefor, the successor servicer appointed pursuant to the following paragraph, shall
be entitled to all funds relating to the Loans which the Servicer would have been entitled to
receive from the Collection Account pursuant to Section 5.01 hereof as if the Servicer had
continued to act as servicer hereunder, together with other Servicing Compensation in the form of
assumption fees, late payment charges or otherwise as provided in Section 4.15 of the Servicing
Addendum. The Servicer shall not be entitled to any termination fee if it is terminated pursuant to
Section 9.01 hereof but shall be entitled to any accrued and unpaid Servicing Compensation
to the date of termination.
Any collections received by the Servicer after removal or resignation shall be endorsed by it
to the Indenture Trustee and remitted directly to the successor servicer. The compensation of any
successor servicer appointed shall be the Servicing Fee, together with other Servicing Compensation
provided for herein. The Indenture Trustee, the Issuer, any Custodian, the Servicer and any such
successor servicer shall take such action, consistent with this Agreement, as shall be reasonably
necessary to effect any such succession. Any costs or expenses incurred by the Indenture Trustee in
connection with the termination of the Servicer and the succession of a successor servicer shall be
an expense of the outgoing Servicer and, to the extent not paid thereby, an expense of such
successor servicer. The Servicer agrees to cooperate with the Indenture Trustee and any successor
servicer in effecting the termination of the Servicer’s servicing responsibilities and rights
hereunder and shall promptly provide the successor servicer all documents and records reasonably
requested by it to enable it to assume the Servicer’s functions hereunder and shall promptly also
transfer to the successor servicer all amounts which then have been or should have been deposited
in any Trust Account maintained by the Servicer or which are thereafter received with respect to
the Loans. Upon the occurrence of an Event of Default, the Majority Noteholders shall have the
right to order the Servicer’s Loan Files and all other files of the Servicer relating to the Loans
and all other records of the Servicer and all documents relating to the Loans which are then or may
thereafter come into the possession of the Servicer or any third party acting for the Servicer to
be delivered to such custodian or servicer as it selects and the Servicer shall deliver to such
custodian or servicer such assignments as the Majority Noteholders shall request. No successor
servicer shall be held liable by reason of any failure to make, or any delay in making, any
distribution hereunder or any portion thereof caused by (i) the failure of the Servicer to deliver,
or any delay in delivering, cash, documents or records to it or (ii) restrictions imposed by any
regulatory authority having jurisdiction over the Servicer hereunder. No appointment of a successor
to the Servicer hereunder shall be effective until written notice of such proposed appointment
shall have been provided to the Noteholders, the Indenture Trustee, the Issuer and the Depositor,
and the Majority Noteholders and the Issuer shall have consented in writing thereto.
In connection with such appointment and assumption, the Majority Noteholders may make such
arrangements for the compensation of such successor servicer out of payments on the Loans as they
and such successor servicer shall agree.
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Section 9.03 Waiver of Defaults.
The Majority Noteholders may waive any events permitting removal of the Servicer as servicer
pursuant to this Article IX. Upon any waiver of a past default, such default shall cease to exist
and any Servicer Event of Default arising therefrom shall be deemed to have been remedied for every
purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair
any right consequent thereto except to the extent expressly so waived.
Section 9.04 Accounting Upon Termination of Servicer.
Upon termination of the Servicer under this Article IX, the Servicer shall, at its own
expense:
(a) deliver to its successor or, if none shall yet have been appointed, to the
Indenture Trustee the funds in any Trust Account maintained by the Servicer;
(b) deliver to its successor or, if none shall yet have been appointed, to the
Custodian all Loan Files and related documents and statements held by it hereunder and a Loan
portfolio by computer transmission or disk;
(c) deliver to its successor or, if none shall yet have been appointed, to the
Indenture Trustee and to the Issuer and the Securityholders a full accounting of all funds,
including a statement showing the Monthly Payments collected by it and a statement of monies held
in trust by it for payments or charges with respect to the Loans; and
(d) execute and deliver such instruments and perform all acts reasonably requested
in order to effect the orderly and efficient transfer of servicing of the Loans to its successor
and to more fully and definitively vest in such successor all rights, powers, duties,
responsibilities, obligations and liabilities of the Servicer under this Agreement.
ARTICLE X
TERMINATION; PUT OPTION
Section 10.01 Termination.
(a) This Agreement shall terminate upon either: (A) the later of (i) the
satisfaction and discharge of the Indenture and the provisions thereof, including payment to the
Noteholders of all amounts due and owing in accordance with the provisions hereof or (ii) the
disposition of all funds with respect to the last Loan and the remittance of all funds due
hereunder and the payment of all amounts due and payable, including, without limitation,
indemnification payments payable pursuant to any Basic Document to the Indenture Trustee, the Owner
Trustee, the Issuer, the Servicer and the Custodian, written notice of the occurrence of either of
which shall be provided to the Indenture Trustee by the Servicer; or (B) the mutual consent of the
Servicer, the Depositor and all Securityholders in writing and delivered to the Indenture Trustee
by the Servicer.
(b) The Securities shall be subject to an early redemption or termination at the
option of the Servicer and the Majority Noteholders in the manner and subject to the provisions of
Section 10.02 and 10.04 of this Agreement.
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(c) Except as provided in this Article X, none of the Depositor, the Servicer
nor any Certificateholder or Noteholder shall be entitled to revoke or terminate the Trust.
Section 10.02 Optional Termination.
The Servicer may, at its option, effect an early termination of the Trust on any Payment Date
on or after the Clean-up Call Date. The Servicer shall effect such early termination by providing
notice thereof to the Indenture Trustee and Owner Trustee and by purchasing all of the Loans at a
purchase price, payable in cash, equal to or
greater than the Termination Price. The expense of any Independent appraiser required in
connection with the calculation and payment of the Termination Price under this Section
10.02 shall be a nonreimbursable expense of the Servicer.
Any such early termination by the Servicer shall be accomplished by depositing into the
Collection Account on the third Business Day prior to the Payment Date on which the purchase is to
occur the amount of the Termination Price to be paid. The Termination Price and any amounts then on
deposit in the Collection Account (other than any amounts withdrawable pursuant to Section
5.01(c)(1) hereof) shall be deposited in the Distribution Account and distributed by the
Indenture Trustee pursuant to Section 5.01(c)(3) of this Agreement and Section 9.1
of the Trust Agreement on the next succeeding Payment Date; and any amounts received with respect
to the Loans and Foreclosure Properties subsequent to the final Payment Date shall belong to the
purchaser thereof.
Section 10.03 Notice of Termination.
Notice of termination of this Agreement or of early redemption and termination of the Issuer
pursuant to Section 10.01 shall be sent by the Indenture Trustee to the Noteholders in
accordance with Section 10.02 of the Indenture.
Section 10.04 Put Option.
The Majority Noteholders may, at their option, effect a put of the entire outstanding Note
Principal Balance, or any portion thereof, to the Trust on any date by exercise of the Put Option.
The Majority Noteholders shall effect such put by providing notice thereof in accordance with
Section 10.05 of the Indenture.
Unless otherwise agreed by the Majority Noteholders, on the third Business Day prior to the
Put Date the Issuer shall deposit the Note Redemption Amount into the Distribution Account and, if
the Put Date occurs after the termination of the Revolving Period and constitutes a put of the
entire outstanding Note Principal Balance, any amounts then on deposit in the Collection Account
(other than any amounts withdrawable pursuant to Section 5.01(c)(1) hereof) shall be
deposited in the Distribution Account and distributed by the Paying Agent pursuant to Section
5.01(c)(3) of this Agreement on the Put Date; and any amounts received with respect to the
Loans and Foreclosure Properties subsequent to the Put Date shall belong to the Issuer.
ARTICLE XI
MISCELLANEOUS PROVISIONS
Section 11.01 Acts of Securityholders.
Except as otherwise specifically provided herein and except with respect to Section
11.02(b), whenever action, consent or approval of the Securityholders is required under this
Agreement,
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such action, consent or approval shall be deemed to have been taken or given on behalf of, and
shall be binding upon, all Securityholders if the Majority Noteholders agree to take such, action
or give such consent or approval.
Section 11.02 Amendment.
(a) This Agreement may be amended from time to time by the Depositor, the Servicer,
the Loan Originator, the Indenture Trustee and the Issuer by written agreement with notice thereof
to the Securityholders, without the consent of any of the Securityholders, to cure any error or
ambiguity, to correct or supplement any
provisions hereof which may be defective or inconsistent with any other provisions hereof or
to add any other provisions with respect to matters or questions arising under this Agreement;
provided, however, that such action will not adversely affect in any material respect the interests
of the Securityholders, as evidenced by an Opinion of Counsel to such effect provided at the
expense of the party requesting such Amendment.
(b) This Agreement may also be amended from time to time by the Depositor, the
Servicer, the Loan Originator, the Indenture Trustee and the Issuer by written agreement, with the
prior written consent of the Majority Noteholders, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement, or of modifying in
any manner the rights of the Securityholders; provided, however, that no such amendment shall (i)
reduce in any manner the amount of, or delay the timing of, collections of payments on Loans or
distributions which are required to be made on any Security, without the consent of the holders of
100% of the Securities, (ii) adversely affect in any material respect the interests of any of the
holders of the Securities in any manner other than as described in clause (i), without the consent
of the holders of 100% of the Securities, or (iii) reduce the percentage of the Securities, the
consent of which is required for any such amendment, without the consent of the holders of 100% of
the Securities.
(c) It shall not be necessary for the consent of Securityholders under this Section
to approve the particular form of any proposed amendment, but it shall be sufficient if such
consent shall approve the substance thereof.
Prior to the execution of any amendment to this Agreement, the Issuer and the Indenture
Trustee shall be entitled to receive and rely upon an Opinion of Counsel provided at the expense of
the party requesting such amendment stating that the execution of such amendment is authorized or
permitted by this Agreement. The Issuer and the Indenture Trustee may, but shall not be obligated
to, enter into any such amendment which affects the Issuer’s own rights, duties or immunities of
the Issuer or the Indenture Trustee, as the case may be, under this Agreement.
Section 11.03 Recordation of Agreement.
To the extent permitted by applicable law, this Agreement, or a memorandum thereof if
permitted under applicable law, is subject to recordation in all appropriate public offices for
real property records in all of the counties or other comparable jurisdictions in which any or all
of the Mortgaged Property is situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Servicer at the Securityholders’ expense on
direction of the Majority Noteholders but only when accompanied by an Opinion of Counsel to the
effect that such recordation materially and beneficially affects the interests of the
Securityholders or is necessary for the administration or servicing of the Loans.
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Section 11.04 Duration of Agreement.
This Agreement shall continue in existence and effect until terminated as herein
provided.
Section 11.05 Governing Law.
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS
LAW OF THE STATE OF NEW YORK).
Section 11.06 Notices.
All demands, notices and communications hereunder shall be in writing and shall be deemed to
have been duly given if (i) delivered personally, mailed by overnight mail, certified mail or
registered mail, postage prepaid, or (ii) transmitted by telecopy, upon telephone confirmation of
receipt thereof, as follows:
(1) in the case of the Depositor, to Option One Loan Warehouse
Corporation, 3 Ada, Irvine, California 92618, or such other addresses or
telecopy or telephone numbers as may hereafter be furnished to the
Securityholders and the other parties hereto in writing by the Depositor;
(2) in the case of the Trust, to Option One Owner Trust 2005-9,
c/o Wilmington Trust Company, One Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration,
telephone number: (302) 651-1000, telecopy number: (302) 636-4144, or such
other address or telecopy or telephone numbers as may hereafter be furnished to
the Noteholders and the other parties hereto in writing by the Trust;
(3) in the case of the Loan Originator, to Option One Mortgage
Corporation, 3 Ada, Irvine, California 92618, Attention: William O’Neill,
telecopy number: (949) 790-7540, telephone number: (949) 790-7504 or such other
addresses or telecopy or telephone numbers as may hereafter be furnished to the
Securityholders and the other parties hereto in writing by the Loan Originator,
(4) in the case of the Servicer, to Option One Mortgage
Corporation 3 Ada, Irvine, California 92618, Attention: William O’Neill,
telecopy number: (949) 790-7540, telephone number: (949) 790-7504 or such other
addresses or telecopy or telephone numbers as may hereafter be furnished to the
Securityholders and the other parties hereto in writing by the Servicer; and
(5) in the case of the Indenture Trustee, at P.O. Box 98,
Columbia, Maryland 21046, Attention: Option One Owner Trust 2005-9, with a copy
to the Corporate Trust Office, as defined in the Indenture, any such notices
shall be deemed to be effective with respect to any party hereto upon the
receipt of such notice or telephone confirmation thereof by such party, except;
provided, that notices to the Securityholders shall be effective upon mailing
or personal delivery.
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Section 11.07 Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of this Agreement
shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of
this Agreement and shall in no way affect the validity or enforceability of the other covenants,
agreements, provisions or terms of this Agreement.
Section 11.08 No Partnership.
Nothing herein contained shall be deemed or construed to create any partnership or joint
venture between the parties hereto and the services of the Servicer shall be rendered as an
independent contractor.
Section 11.09 Counterparts.
This Agreement may be executed in one or more counterparts and by the different parties hereto
on separate counterparts, each of which, when so executed, shall be deemed to be an original; such
counterparts, together, shall constitute one and the same Agreement.
Section 11.10 Successors and Assigns.
This Agreement shall inure to the benefit of and be binding upon the Servicer, the Loan
Originator, the Depositor, the Indenture Trustee, the Issuer and the Securityholders and their
respective successors and permitted assigns.
Section 11.11 Headings.
The headings of the various Sections of this Agreement have been inserted for convenience of
reference only and shall not be deemed to be part of this Agreement.
Section 11.12 Actions of Securityholders.
(a) Any request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Agreement to be given or taken by Securityholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by such Securityholders
in person or by an agent duly appointed in writing; and except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments are delivered to
the Depositor, the Loan Originator, the Servicer or the Issuer. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any purpose of this
Agreement and conclusive in favor of the Depositor, the Loan Originator, the Servicer and the
Issuer if made in the manner provided in this Section 11.12.
(b) The fact and date of the execution by any Securityholder of any such instrument
or writing may be proved in any reasonable manner which the Depositor, the Loan Originator, the
Servicer or the Issuer may deem sufficient.
(c) Any request, demand, authorization, direction, notice, consent, waiver or other
act by a Securityholder shall bind every holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, or
omitted to be done, by the Depositor, the Loan Originator, the Servicer or the Issuer in reliance
thereon, whether or not notation of such action is made upon such Security.
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(d) The Depositor, the Loan Originator, the Servicer or the Issuer may require
additional proof of any matter referred to in this Section 11.12 as it shall deem
necessary.
Section 11.13 Non-Petition Agreement.
Notwithstanding any prior termination of any Basic Document, the Loan Originator, the
Servicer, the Depositor and the Indenture Trustee each severally and not jointly covenants that it
shall not, prior to the date which is one year and one day after the payment in full of the all of
the Notes, acquiesce, petition or otherwise, directly
or indirectly, invoke or cause the Trust or the Depositor to invoke the process of any
governmental authority for the purpose of commencing or sustaining a case against the Issuer or
Depositor under any Federal or state bankruptcy, insolvency or similar law or appointing a
receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the
Issuer or Depositor or any substantial part of their respective property or ordering the winding up
or liquidation of the affairs of the Issuer or the Depositor.
Section 11.14 Holders of the Securities.
(a) Any sums to be distributed or otherwise paid hereunder or under this Agreement
to the holders of the Securities shall be paid to such holders pro rata based on their Percentage
Interests;
(b) Where any act or event hereunder is expressed to be subject to the consent or
approval of the holders of the Securities, such consent or approval shall be capable of being given
by the holder or holders evidencing in the aggregate not less than 51% of the Percentage Interests.
Section 11.15 Due Diligence Fees, Due Diligence.
The Loan Originator acknowledges that the Noteholder Agent shall have the right to perform
continuing due diligence reviews with respect to the Loans, for purposes of verifying compliance
with the representations, warranties and specifications made hereunder, or otherwise, and the Loan
Originator agrees that upon reasonable prior notice (with no notice being required upon the
occurrence of an Event of Default) to the Loan Originator, the Noteholder Agent, the Indenture
Trustee and Custodian or their respective authorized representatives will be permitted during
normal business hours to examine, inspect, and make copies and extracts of, the Loan Files and any
and all documents, records, agreements, instruments or information relating to such Loans in the
possession or under the control of the Servicer and the Indenture Trustee. The Loan Originator also
shall make available to the Noteholder Agent a knowledgeable financial or accounting officer for
the purpose of answering questions respecting the Loan Files and the Loans and the financial
condition of the Loan Originator. Without limiting the generality of the foregoing, the Loan
Originator acknowledges that the Noteholders may purchase Notes based solely upon the information
provided by the Loan Originator to the Noteholders in the Loan Schedule and the representations,
warranties and covenants contained herein, and that the Noteholder Agent, at its option, has the
right at any time to conduct a partial or complete due diligence review on some or all of the Loans
securing such purchase, including without limitation ordering new credit reports and new appraisals
on the related Mortgaged Properties and otherwise re-generating the information used to originate
such Loan. The Noteholder Agent may underwrite such Loans itself or engage a mutually agreed upon
third party underwriter to perform such underwriting. The Loan Originator agrees to cooperate with
the Noteholder Agent and any third party underwriter in connection with such underwriting,
including, but not limited to, providing the Noteholder Agent and any third party underwriter with
access to any and all documents, records, agreements, instruments or information relating to such
Loans in the possession, or under the control, of the Servicer. The Loan Originator further agrees
that the Loan Originator shall reimburse the Noteholder Agent for any and all reasonable
out-of-pocket costs and expenses incurred by the Noteholder Agent in connection with the Noteholder
Agent’s activities pursuant to this Section 11.15 hereof (the
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“Due Diligence Fees”), provided that, unless an Event of Default shall occur, the
aggregate reimbursement obligation of the Loan Originator with respect to Due Diligence Fees shall
be limited to $50,000 per annum. In addition to the obligations set forth in Section 11.17
of this Agreement, Noteholders agree (on behalf of themselves and
their Affiliates, directors, officers, employees and representatives) to use reasonable precaution
to keep confidential, in accordance with its customary procedures for handling confidential
information and in accordance with safe and sound practices, and not to disclose to any third
party, any non-public information supplied to it or otherwise obtained by it hereunder with respect
to the Loan Originator or any of its Affiliates (including, but not limited to, the Loan File);
provided, however, that nothing herein shall prohibit the disclosure of any such information to the
extent required by statute, rule, regulation or judicial process; provided, further that, unless
specifically prohibited by applicable law or court order, the Noteholders shall, prior to
disclosure thereof, notify the Loan Originator of any request for disclosure of any such non-public
information. The Noteholders further agree not to use any such non-public information for any
purpose unrelated to this Agreement and that the Noteholders shall not disclose such non-public
information to any third party underwriter in connection with a potential Disposition without
obtaining a written agreement from such third party underwriter to comply with the confidentiality
provisions of this Section 11.15. Without limiting the foregoing, non-public information
shall not include information which (i) is or becomes generally available to the public other than
as a result of a disclosure; (ii) was available to the Noteholders on a non-confidential basis
prior to its disclosure to such Noteholders by the Servicer or the Loan Originator; (iii) is
required to be disclosed by a governmental authority or related governmental agencies or as
otherwise required by law; or (iv) becomes available to the Noteholders on a non-confidential basis
from a Person other than the Servicer or the Loan Originator who, to the best knowledge of such
Noteholders, is not otherwise bound by a confidentiality agreement with the Servicer or the Loan
Originator and is not otherwise prohibited from transmitting the information to such Noteholders.
Section 11.16 No Reliance.
Each of the Loan Originator, the Depositor, the Servicer and the Issuer hereby acknowledges
that it has not relied on any of the Noteholder Agent, the Noteholders or any of their officers,
directors, employees, agents and “control persons” as such term is used under the Act and under the
Securities Exchange Act of 1934, as amended, for any tax, accounting, legal or other professional
advice in connection with the transactions contemplated by the Basic Documents, that each of the
Loan Originator, the Depositor, the Servicer and the Issuer has retained and been advised by such
tax, accounting, legal and other professionals as it has deemed necessary in connection with the
transactions contemplated by the Basic Documents and that neither the Noteholder Agent nor any of
the Noteholders makes any representation or warranty, and shall have no liability with respect to,
the tax, accounting or legal treatment or implications relating to the transactions contemplated by
the Basic Documents.
Section 11.17 Confidential Information.
In addition to the confidentiality requirements set forth in Section 11.15 of the
Agreement, each Noteholder, as well as the Indenture Trustee and the Disposition Agent (each of
said parties singularly referred to herein as a “Receiving Party” and collectively referred to
herein as the “Receiving Parties”), agrees to hold and treat all Confidential Information
(as defined below) in confidence and in accordance with this Section. Such Confidential Information
will not, without the prior written consent of the Servicer and the Loan Originator, be disclosed
or used by such Receiving Parties or their subsidiaries, Affiliates, directors, officers, members,
employees, agents or controlling persons (collectively, the “Information Recipients”) other
than for the purpose of making a decision to purchase or sell Notes or taking any other permitted
action under this Agreement or any other Basic Document. Each Receiving Party agrees to disclose
Confidential Information only to its Information Recipients who need to know it for the purpose of
making a decision to purchase or sell Notes or taking any other permitted
71
action under this Agreement or any other Basic Document (including in connection with the
servicing of the Loans and in connection with any servicing transfers) and who are informed by such
Receiving Party of its confidential nature and who agree to be bound by the terms of this
Section 11.17. Disclosure that is not in violation of the Right to Financial Privacy Act,
the Gramm-Leach-Bliley Act or other applicable law by such Receiving Party of any Confidential
Information at the request of its outside auditors or governmental regulatory authorities in
connection with an examination of a Receiving Party by any such authority shall not constitute a
breach of its obligations under this Section 11.17 and shall not require the prior consent
of the Servicer and the Loan Originator.
Each Receiving Party shall be responsible for any breach of this Section 11.17 by its
Information Recipients. The Noteholders may use Confidential Information for internal due diligence
purposes in connection with their analysis of the transactions contemplated by the Basic Documents.
The Disposition Agent may disclose Confidential Information to the Disposition Participants as
required to effect Dispositions. This Section 11.17 shall terminate upon the occurrence of
an Event of Default; provided, however, that such termination shall not relieve the Receiving
Parties or their respective Information Recipients from the obligation to comply with the
Gramm-Leach-Bliley Act or other applicable law with respect to their use or disclosure of
Confidential Information following the occurrence of an Event of Default.
As used herein, “Confidential Information” means non-public personal information (as defined
in the Gramm-Leach-Bliley Act and its enabling regulations issued by the Federal Trade Commission)
regarding Borrowers. Confidential Information shall not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by a Receiving Party or
any Information Recipients; (ii) was available to a Receiving Party on a non-confidential basis
prior to its disclosure to such Receiving Party by the Servicer or the Loan Originator; (iii) is
required to be disclosed by a governmental authority or related governmental agencies or as
otherwise required by law; (iv) becomes available to a Receiving Party on a non-confidential basis
from a Person other than the Servicer or the Loan Originator who, to the best knowledge of such
Receiving Party, is not otherwise bound by a confidentiality agreement with the Servicer or the
Loan Originator and is not otherwise prohibited from transmitting the information to such Receiving
Party. Without limiting the generality of the foregoing, the parties acknowledge and agree that
this Agreement and other Basic Documents will be filed with the Securities and Exchange Commission
as exhibits to filings of the Loan Originator’s parent corporation under the Securities Exchange
Act of 1934.
Section 11.18 Conflicts.
Notwithstanding anything contained in the Basic Documents to the contrary, in the event of the
conflict between the terms of this Agreement and any other Basic Document, the terms of this
Agreement shall control.
Section 11.19 Limitation on Liability.
It is expressly understood and agreed by the parties hereto that (a) this Agreement is
executed and delivered by Wilmington Trust Company, not individually or personally, but solely as
Owner Trustee of Option One Owner Trust 2005-9, in the exercise of the powers and authority
conferred and vested in it, (b) each of the representations, undertakings and agreements herein
made on the part of the Issuer is made and intended not as personal representations, undertakings
and agreements by Wilmington Trust Company but is made and intended for the purpose for binding
only the Issuer, (c) nothing herein contained shall be construed as creating any liability on
Wilmington Trust Company, individually or personally, to perform any covenant either expressed or
implied contained herein, all such. liability, if any, being expressly waived by the parties hereto
and by any Person claiming by, through or
72
under the parties hereto and (d) under no circumstances shall Wilmington Trust Company be
personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for
the breach or failure of any obligation, representation, warranty or covenant made or undertaken by
the Issuer under this Agreement or any other related documents.
Section 11.20 No Agency.
Nothing contained herein or in the Basic Documents shall be construed to create an agency or
fiduciary relationship between the Noteholder Agent, any Noteholder or the Majority Noteholders or
any of their Affiliates and the Issuer, the Depositor, the Loan Originator or the Servicer. None of
the Noteholder Agent, any Noteholder, the Majority Noteholders or any of their Affiliates shall be
liable for any acts or actions affected in connection with a disposition of Loans, including
without limitation, any Securitization pursuant to Section 3.07, any Loan Originator Put or
Servicer Call pursuant to Section 3.08 hereof nor any Whole Loan Sale pursuant to
Section 3.07 hereof.
(SIGNATURE PAGE FOLLOWS)
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IN WITNESS WHEREOF, the Issuer, the Depositor, the Servicer, the Indenture Trustee and
the Loan Originator have caused their names to be signed by their respective officers thereunto
duly authorized, as of the day and year first above written, to this Sale and Servicing Agreement.
| OPTION ONE OWNER TRUST 2005-9, | ||||
| BY: Wilmington Trust Company not in its individual capacity but solely as Owner Trustee | ||||
| BY: | /s/ | |||
| Name: Joann A. Rozell | ||||
| Title: Assistant Vice President | ||||
| OPTION ONE LOAN WAREHOUSE CORPORATION, as Depositor | ||||
| BY: | /s/ | |||
| Name: Charles R. Fulton | ||||
| Title: Assistant Secretary | ||||
| OPTION ONE MORTGAGE CORPORATION, as Loan Originator and Servicer | ||||
| BY: | /s/ | |||
| Name: Charles R. Fulton | ||||
| Title: Vice President | ||||
| WELLS FARGO BANK, N.A., as Indenture Trustee | ||||
| BY: | /s/ | |||
| Name: Darron C. Woodus | ||||
| Title: Assistant Vice President | ||||
EXHIBIT A
FORM OF NOTICE OF ADDITIONAL NOTE PRINCIPAL BALANCE
[LETTERHEAD OF OPTION ONE LOAN WAREHOUSE CORPORATION]
[Date]
Option One Owner Trust 2005-9
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Attention: Corporate Trust Administration
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Attention: Corporate Trust Administration
Wells Fargo Bank, N.A.
9062 Old Annapolis Road
Columbia, Maryland 21045
Attention: Option One Owner Trust 2005-9
9062 Old Annapolis Road
Columbia, Maryland 21045
Attention: Option One Owner Trust 2005-9
DB Structured Products, Inc.
Gemini Securitization Corp., LLC
Aspen Funding Corp.
Newport Funding Corp.
60 Wall Street
New York, New York 10005
Attention: Frank Grausso
Email: frank.grausso@db.com and abs-conduits@db.com
Telephone: (212) 250-7311
Facsimile: (212) 797-5150
Gemini Securitization Corp., LLC
Aspen Funding Corp.
Newport Funding Corp.
60 Wall Street
New York, New York 10005
Attention: Frank Grausso
Email: frank.grausso@db.com and abs-conduits@db.com
Telephone: (212) 250-7311
Facsimile: (212) 797-5150
Re: Option One Owner Trust 2005-9 Mortgage-Backed Notes
Reference is made to the Sale and Servicing Agreement, dated as of December 30, 2005 (the
“Sale and Servicing Agreement”), among Option One Owner Trust 2005-9, as Issuer, Option One Loan
Warehouse Corporation, as Depositor, Option One Mortgage Corporation, as Loan Originator and
Servicer, and Wells Fargo Bank, N.A., as Indenture Trustee. Capitalized terms not defined herein
shall have the meanings assigned to such terms in the Sale and Servicing Agreement.
The undersigned , a duly appointed
of Option One Loan Warehouse Corporation, acting in such capacity, hereby requests an
advance of Additional Note Principal Balance in an amount of $ , such
amount to be advanced on , 200_, a Business Day at least two Business
Days from the date hereof.
| Very truly yours, | ||||
| OPTION ONE LOAN WAREHOUSE CORPORATION | ||||
| By: | ||||
A-1
| Name: | ||||
| Title: | ||||
A-2
EXHIBIT B
FORM OF SERVICER’S REMITTANCE REPORT TO INDENTURE TRUSTEE
Trial Balance Information Report P139
| Next | ||||||||||||||||||||||||||||||||
| Investor | Borrower | Pymt | Interest | P&I | Principal | |||||||||||||||||||||||||||
| Investor # | Category | Loan # | Loan # | Name | Date | Rate | Pymt | Balance | ||||||||||||||||||||||||
Collection Activity Information Report S215
| Pymt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investor | Investor | Transaction | Paymt | Due | Service | Net | Total | Principal | Late | |||||||||||||||||||||||||||||||||||||||||||||||
| # | Category | Loan # | Loan # | Date | # | Date | Escrow | Principal | Interest | Fees | Interest | Deposit | Balance | Charges | ||||||||||||||||||||||||||||||||||||||||||
Payoff Activity Information Report S214
| Next | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investor | Investor | Date | P&I | Interest | Service | Pymt | Service | Net | Prepay | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| # | Category | Loan # | Loan # | Paid | Pymt | Rate | Fee Rate | Date | Principal | Interest | Fees | Interest | Premium | Collected | ||||||||||||||||||||||||||||||||||||||||||
B-1
EXHIBIT C
FORM OF S&SA ASSIGNMENT
ASSIGNMENT NO. ___OF LOANS (“S&SA Assignment”), dated ,
(the “Transfer Date”), by OPTION ONE LOAN WAREHOUSE CORPORATION, (the “Depositor”) to OPTION ONE
OWNER TRUST 2005-9 (the “Issuer”) pursuant to the Sale and Servicing Agreement referred to below.
WITNESSETH:
WHEREAS, the Depositor and the Issuer are parties to the Sale and Servicing Agreement
dated as of December 30, 2005 (the “Sale and Servicing Agreement”) among the Depositor, the Issuer,
the Servicer, the Loan Originator and the Indenture Trustee on behalf of the Noteholders,
hereinafter as such agreement may have been, or may from time to time be, amended, supplemented or
otherwise modified;
WHEREAS, pursuant to the Sale and Servicing Agreement, the Depositor wishes to sell, convey,
transfer and assign Loans to the Issuer in exchange for cash consideration, the Trust Certificates
and other good and valid consideration the receipt and sufficiency of which is hereby acknowledged;
and
WHEREAS, the Issuer is willing to acquire such Loans subject to the terms and conditions
hereof and of the Sale and Servicing Agreement;
NOW THEREFORE, the Depositor and the Issuer hereby agree as follows:
1. Defined Terms. All capitalized terms defined in the Sale and Servicing
Agreement and used herein shall have such defined meanings when used herein, unless otherwise
defined herein.
2. Designation of Loans. The Depositor does hereby deliver herewith a Loan
Schedule containing a true and complete list of each Loan to be conveyed on the Transfer Date. Such
list is marked as Schedule A to this S&SA Assignment and is hereby incorporated into and made a
part of this S&SA Assignment.
3. Conveyance of Loans. The Depositor hereby sells, transfers, assigns and
conveys to the Issuer, without recourse, all of the right, title and interest of the Depositor in
and to the Loans and all proceeds thereof listed on the Loan Schedule attached hereto, including
all interest and principal received by the Depositor or the Servicer on or with respect to the
Loans on or after the related Transfer Cut-off Date, together with all right, title and interest in
and to the proceeds of any related Mortgage Insurance Policies.
4. Issuer Acknowledges Assignment. As of the Transfer Date, pursuant to
this S&SA Assignment and Section 2.01(a) of the Sale and Servicing Agreement, the Issuer
acknowledges its receipt of the Loans listed on the attached Loan Schedule and all other related
property in the Trust Estate.
5. Acceptance of Rights But Not Obligations. The foregoing sale, transfer,
assignment, set over and conveyance does not, and is not intended to, result in a creation or an
assumption by the Issuer of any obligation of the Depositor, the Loan Originator or any other
Person in connection
C-1
with this S&SA Assignment or under any agreement or instrument relating thereto except as
specifically set forth herein.
6. Depositor Acknowledges Receipt of Sales Price. The Depositor hereby
acknowledges receipt of the Sales Price or that is otherwise distributed at its direction.
7. Conditions Precedent. The conditions precedent in Section 2.06(a) of the
Sale and Servicing Agreement have been satisfied.
8. Limitation of Liability. Section 11.19 of the Sale and Servicing
Agreement is incorporated by reference.
9. Counterparts. This S&SA Assignment may be executed in any number of
counterparts all of which taken together shall constitute one and the same instrument.
C-2
IN WITNESS WHEREOF, the undersigned have caused this S&SA Assignment to be duly executed and
delivered by their respective duly authorized officers on the day and year first above written.
| OPTION ONE LOAN WAREHOUSE CORPORATION, | ||||||
| as Depositor | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| OPTION ONE OWNER TRUST 2005-9, as Issuer |
||||||
| By: Wilmington Trust Company not in its individual capacity but solely as Owner Trustee | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
C-3
EXHIBIT D
PIGGY BACKED LOAN UNDERWRITING CRITERIA
D-1
EXHIBIT E
LOAN SCHEDULE
The Loan Schedule shall set forth the following information with respect to each Loan
(other than Wet Funded Loans):
(1)
|
the Loan Originator’s Loan identifying number; | |
(2)
|
the Mortgagor’s name and social security number; | |
(3)
|
the street address of the Mortgaged Property, including the state and zip code; | |
(4)
|
the Promissory Note date; | |
(5)
|
the loan purpose (whether purchase, cash-out refinance or rate/term refinance); | |
(6)
|
a code indicating whether the Mortgaged Property was represented by the Mortgagor as being owner-occupied on the date of origination; | |
(7)
|
the type of Residential Dwelling constituting the Mortgaged Property; | |
(8)
|
the origination date; | |
(9)
|
the months to maturity at origination, based on the original amortization schedule; | |
(10)
|
the loan-to-value ratio or, if applicable, the combined loan-to-value ratio, at origination; | |
(11)
|
the rate of interest in effect on the Transfer Cut-off Date; | |
(12)
|
the date on which the first monthly payment was due, and, if different, the date on which monthly payments are due as of the Transfer Cut-off Date; | |
(13)
|
the paid-through date and the next payment date; | |
(14)
|
the stated maturity date; | |
(15)
|
the amount of the monthly payment due at origination; | |
(16)
|
the amount of the principal and interest payment due on the first due date after the Transfer Cut-off Date; | |
(17)
|
the interest paid-through date; | |
(18)
|
the last monthly payment date on which any portion of the monthly payment was applied to the reduction of principal; | |
(19)
|
the original principal balance; | |
(20)
|
the unpaid principal balance as of the close of business on the Transfer Cut-off Date; | |
(21)
|
the unpaid principal balance as of the last day of the immediately preceding month; | |
(22)
|
a code indicating whether the interest rate on the Loan is fixed or adjustable; | |
(23)
|
if the Loan is an adjustable-rate loan, the initial adjustment date thereunder, including the look-back period; | |
(24)
|
if the Loan is an adjustable-rate loan, the gross margin over the applicable interest rate index; | |
(25)
|
a code indicating the purpose of the Loan, as indicated by the Mortgagor (i.e., purchase financing, rate/term refinancing or cash-out refinancing); | |
(26)
|
(if the Loan is an adjustable-rate loan, the maximum interest rate; | |
(27)
|
if the Loan is an adjustable-rate loan, the minimum interest rate; | |
(28)
|
if the Loan is an adjustable-rate loan, the index, ARM code, adjustment frequency, spread and caps; | |
(29)
|
the interest rate at origination; |
E-1
(30)
|
if the Loan is an adjustable-rate loan, the periodic rate cap and the maximum adjustment in the interest rate that may be made on the first adjustment date immediately following the Transfer Cut-off Date; | |
(31)
|
a code indicating the documentation program (i.e., full documentation, limited documentation or stated income); | |
(32)
|
if the Loan is an adjustable-rate loan, the applicable interest rate index to which the gross margin is added, including the source of such index; | |
(33)
|
if the Loan is an adjustable-rate loan, the first adjustment date thereunder to occur after the Transfer Cut-off Date; | |
(34)
|
if the Loan is a 40/30 Loan; | |
(35)
|
the risk grade; | |
(36)
|
any risk upgrade; | |
(37)
|
the appraised value of the Mortgaged Property at origination; | |
(38)
|
if different from the appraised value, the dollar value of the review appraisal of the Mortgaged Property at origination; | |
(39)
|
the sale price of the Mortgaged Property, if applicable; | |
(40)
|
the product type code (e.g., 3/27, 2/28, balloon, etc.); | |
(41)
|
a code indicating whether the Loan is a first-lien loan or a second-lien loan; | |
(42)
|
if the Loan is a second-lien loan, the outstanding principal balance of the first lien on the date of origination of such Loan and the monthly payment and maturity date of the first-lien loan; | |
(43)
|
if the Loan is a second-lien loan, the combined loan-to-value ratio of such Loan and the first lien to which it is subject, as of the origination date of such Loan; | |
(44)
|
whether such Loan is 30 days or more Delinquent; | |
(45)
|
the prepayment penalty code; | |
(46)
|
the prepayment penalty term; | |
(47)
|
the late charge; | |
(48)
|
the rounding code (next highest or nearest 0.125%); | |
(49)
|
the applicable loan grade and the Mortgagor’s FICO score, if any; and | |
(50)
|
the Mortgagor’s debt-to-income ratio. |
The Loan Schedule to be delivered with respect to Wet Funded Loans shall set forth the
following information:
MBMS Long Format ‘97 w\ Mersflag
| Start | length/ | End | ||||||||||||||||
| Field | Pos | width | Pos | Dec | Definition | |||||||||||||
Loanidp
|
1 | 13 | 13 | 0 | Previous loan number/(Old loan number or Investor loan number) | |||||||||||||
Lname
|
14 | 35 | 48 | 0 | Primary borrower’s name/ (Last, First Middle) | |||||||||||||
Casenum
|
49 | 13 | 61 | 0 | FHA or VA case number | |||||||||||||
Closed
|
62 | 6 | 67 | 0 | Date the loan closed/ (mmddyy) | |||||||||||||
Firstdue
|
68 | 6 | 73 | 0 | Date first pymt on loan was due/ (mmddyy) | |||||||||||||
Issuer
|
74 | 4 | 77 | 0 | User defined issuer code/ (leave blank —pad with spaces) | |||||||||||||
Loanid
|
78 | 13 | 90 | 0 | Loan number/ (Servicer loan number) | |||||||||||||
E-2
| Start | length/ | End | ||||||||||||||||
| Field | Pos | width | Pos | Dec | Definition | |||||||||||||
Maturity
|
91 | 6 | 96 | 0 | Maturity date of the loan/ (mmddyy) | |||||||||||||
Rate
|
97 | 9 | 105 | 0 | Interest rate on note/ (X 1000 to remove decimal (7.125% is 7125) | |||||||||||||
Lnamount
|
10611 | 116 | 0 | Original loan amount/ (X 100 to remove decimal (100000.00 is 1000000) | ||||||||||||||
PI
|
11710 | 126 | 0 | Orig principal plus interest/ (X 100 to remove decimal (1000.00 is 100000) | ||||||||||||||
Poolnum
|
12710 | 136 | 0 | Pool number/ (Agency pool number or private investor code — CPI) | ||||||||||||||
State
|
1372 | 138 | 0 | Property State abbreviation/ (e.g., NY) | ||||||||||||||
City
|
13915 | 153 | 0 | Property City | ||||||||||||||
Zip
|
1545 | 158 | 0 | Property Zip code | ||||||||||||||
Address
|
15935 | 193 | 0 | Property address/ (Number and street name) | ||||||||||||||
Sid
|
19423 | 216 | 0 | Barcode ID (leave blank —pad with spaces) | ||||||||||||||
Armadj
|
2176 | 222 | 0 | 1st Adjustment Date (mmddyy) | ||||||||||||||
Armconv
|
2231 | 223 | 0 | Convertible Account (Y/N) | ||||||||||||||
Armround
|
2246 | 229 | 0 | Percent Rounded (X 100000 to remove decimal (7.12500% is 712500) | ||||||||||||||
Armacap
|
2305 | 234 | 0 | Annual Cap (X 1000 to remove decimal (10.125% is 10125) | ||||||||||||||
Armlcap
|
2355 | 239 | 0 | Lifetime Cap (X 1000 to remove decimal (10.125% is 10125) | ||||||||||||||
Armmargin
|
2404 | 243 | 0 | Margin (X 1000 to remove decimal (7.125% is 7125) | ||||||||||||||
Armfloor
|
2445 | 248 | 0 | Floor (X 1000 to remove decimal (10.125% is 10125) | ||||||||||||||
Mersmin
|
24918 | 266 | 0 | Mers Min | ||||||||||||||
Mersflag
|
2671 | 267 | 0 | Mersflag | ||||||||||||||
Filler
|
268 | 33 | 300 | 0 | Filler field/ (Pad with spaces) | |||||||||||||
If the Loan is a Wet Funded Loan, the Loan Schedule shall also include the name of the Closing
Agent.
E-3
EXHIBIT F
REPRESENTATIONS AND WARRANTIES REGARDING THE LOANS
The Loan Originator hereby represents and warrants to the other parties to the Sale and
Servicing Agreement and the Securityholders, with respect to each such Loan as of the related
Transfer Date (except as otherwise expressly agreed in writing by the Majority Noteholders):
(i) The information set forth in the related Loan Schedule and the
information contained on the electronic data file delivered to the Noteholder Agent is complete,
true and correct;
(ii) All payments required to be made up to the close of business on the
Transfer Date for such Loan under the terms of the Promissory Note have been made; the Loan
Originator has not advanced funds, or induced, solicited or knowingly received any advance of funds
from a party other than the owner of the related Mortgaged Property, directly or indirectly, for
the payment of any amount required by the Promissory Note or Mortgage; and there has been no
delinquency, exclusive of any period of grace, in any payment by the Borrower thereunder during the
last twelve months;
(iii) There are no delinquent taxes, ground rents, water charges, sewer rents,
assessments, insurance premiums, leasehold payments, including assessments payable in future
installments or other outstanding charges affecting the related Mortgaged Property;
(iv) The terms of the Promissory Note and the Mortgage have not been impaired,
waived, altered or modified in any respect and the Promissory Note and the Mortgage have not been
satisfied, canceled, rescinded or subordinated in whole or in part. No instrument of waiver,
alteration, modification, release, cancellation, rescission or satisfaction has been executed, and
no Borrower has been released, in whole or in part;
(v) The Promissory Note and the Mortgage are not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury, nor will the
operation of any of the terms of the Promissory Note or the Mortgage, or the exercise of any right
thereunder, render either the Promissory Note or the Mortgage unenforceable, in whole or in part,
or subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury and no such right of
rescission, set-off, counterclaim or defense has been asserted with respect thereto;
(vi) All buildings upon the Mortgaged Property are insured by an insurer
acceptable to Fannie Mae or Freddie Mac against loss by fire, hazards of extended coverage and such
other hazards as are customary in the area where the Mortgaged Property is located, pursuant to
insurance policies conforming to the requirements of the Servicing Addendum, in an amount
sufficient to avoid the application of any “co-insurance provisions”. All such insurance policies
contain a standard mortgagee clause naming the Loan Originator, its successors and assigns as
mortgagee and all premiums thereon have been paid. If the Mortgaged Property is in an area
identified on a Flood Hazard Map or Flood Insurance Rate Map issued by the Federal Emergency
Management Agency as having special flood hazards (and such flood insurance has been made
available) a flood insurance policy meeting the requirements of the current guidelines of the
Federal Insurance Administration is in effect which policy conforms to the requirements of Fannie
Mae and Freddie Mac. The Mortgage obligates the Borrower thereunder to maintain all such insurance
at the Borrower’s cost and expense, and on the Borrower’s failure to do so, authorizes the holder
of the Mortgage to maintain such insurance at Borrower’s cost and expense and to seek reimbursement
therefor from the Borrower;
F-1
(vii) Any and all requirements of any federal, state or local law including,
without limitation, usury, truth in lending, real estate settlement procedures, consumer credit
protection, equal credit opportunity, fair housing or disclosure laws applicable to the origination
and servicing of the Loans have been complied with;
(viii) The Mortgage has not been satisfied, canceled, subordinated or rescinded,
in whole or in part, and the Mortgaged Property has not been released from the lien of the
Mortgage, in whole or in part, nor has any instrument been executed that would effect any such
satisfaction, cancellation, subordination, rescission or release;
(ix) The Mortgage is a valid, existing and enforceable first lien (or, with
respect to Loans identified as Second Lien Loans on the Loan Schedule, second lien) on the
Mortgaged Property, including all improvements on the Mortgaged Property subject only to (a) the
lien of current real property taxes and assessments not yet due and payable, (b) covenants,
conditions and restrictions, rights of way, easements and other matters of the public record as of
the date of recording being acceptable to mortgage lending institutions generally and specifically
referred to in the lender’s title insurance policy delivered to the originator of the Loan and
which do not adversely affect the Appraised Value of the Mortgaged Property, (c) other matters to
which like properties are commonly subject which do not materially interfere with the benefits of
the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability
of the related Mortgaged Property and (d) the first lien on the Mortgaged Property, in the case of
the Second Lien Loans. Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Loan establishes and creates a valid, existing and enforceable
first or second lien and first or second priority security interest on the property described
therein and the Loan Originator has full right to sell and assign the same to the Depositor and the
Issuer. The Mortgaged Property was not, as of the date of origination of the Loan, subject to a
mortgage, deed of trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage;
(x) The Promissory Note and the related Mortgage are genuine and each is the
legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency or reorganization;
(xi) All parties to the Promissory Note and the Mortgage had legal capacity to
enter into the Loan and to execute and deliver the Promissory Note and the Mortgage, and the
Promissory Note and the Mortgage have been duly and properly executed by such parties. The Borrower
is a natural person;
(xii) The proceeds of the Loan have been fully disbursed to or for the account
of the Borrower and there is no obligation for the mortgagee to advance additional funds thereunder
and any and all requirements as to completion of any on-site or off-site improvement and as to
disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses
incurred in making or closing the Loan and the recording of the Mortgage have been paid, and the
Borrower is not entitled to any refund of any amounts paid or due to the Loan Originator pursuant
to the Promissory Note or Mortgage;
(xiii) The Loan Originator has good title to and is the sole legal, beneficial
and equitable owner of the Promissory Note and the Mortgage and has full right to transfer and sell
the Loan to the Depositor and the Issuer free and clear of any encumbrance, equity, lien, pledge,
charge, claim or security interest;
F-2
(xiv) All parties which have had any interest in the Loan, whether as mortgagee,
assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such
interest, were) in compliance with any and all applicable “doing business” and licensing
requirements of the laws of the state wherein the Mortgaged Property is located;
(xv) The Loan is covered by either (i) a lender’s title insurance policy
(which, in the case of an ARM has an adjustable rate mortgage endorsement) commercially acceptable
to prudent mortgage lending institutions, issued by a title insurer licensed and qualified to do
business in the jurisdiction where the Mortgaged Property is located, insuring (subject to the
exceptions contained in (ix)(a) and (b) above) the Loan Originator, its successors and assigns as
to the first or second priority lien of the Mortgage in the original principal amount of the Loan
and, with respect to any ARM, against any loss by reason of the invalidity or unenforceability of
the lien resulting from the provisions of the Mortgage providing for adjustment in the Loan
Interest Rate and Monthly Payment or (ii) if generally acceptable in the jurisdiction where the
Mortgaged Property is located, an attorney’s opinion of title given by an attorney licensed to
practice law in the jurisdiction where the Mortgaged Property is located. Additionally, such
lender’s title insurance policy affirmatively insures ingress and egress to and from the Mortgaged
Property, and against encroachments by or upon the Mortgaged Property or any interest therein. The
Loan Originator is the sole insured of such lender’s title insurance policy, and such lender’s
title insurance policy is in full force and effect and will be in full force and effect, and the
issuer will be insured thereunder, upon the consummation of the transactions contemplated by this
Agreement. No claims have been made under such lender’s title insurance policy, and no prior holder
of the related Mortgage, including the Loan Originator, has done, by act or omission, anything
which would impair the coverage or enforceability of such lender’s title insurance policy or the
accuracy of such attorney’s opinion of title;
(xvi) There is no default, breach, violation or event of acceleration existing
under the Mortgage or the Promissory Note and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would constitute a default, breach,
violation or event of acceleration and neither the Loan Originator nor any affiliate has not waived
any default, breach, violation or event of acceleration;
(xvii) There are no mechanics’ or similar liens or claims which have been filed
for work, labor or material (and no rights are outstanding that under law could give rise to such
lien) affecting the related Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
(xviii) All improvements which were considered in determining the Appraised Value
of the related Mortgaged Property lay wholly within the boundaries and building restriction lines
of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged
Property;
(xix) The Loan was originated by the Loan Originator or by a savings and loan
association, a savings bank, a commercial bank or similar banking institution which is supervised
and examined by a federal or state authority, or by a mortgagee approved as such by the Secretary
of HUD;
(xx) Payments on the Loan commenced no more than two months after the proceeds
of the Loan were disbursed. The Loan bears interest at the Loan Interest Rate. With respect to each
Loan unless otherwise stated on the Loan Schedule, the Promissory Note is payable on the first day
of each month in Monthly Payments, which, in the case of each fixed-rate Loan except for Balloon
Loans (to the extent permitted under the Pricing Side Letter), are sufficient to fully amortize the
original principal balance over the original term thereof and to pay interest at the related Loan
Interest Rate, and,
F-3
in the case of each ARM, are changed on each Adjustment Date in accordance with the terms of the
related Promissory Note or subsequent modifications, if any, and in any case, are sufficient to
fully amortize the original principal balance over the original term thereof and to pay interest at
the related Loan Interest Rate. The Promissory Note does not permit negative amortization. No Loan
is a Convertible Loan;
(xxi) The origination and collection practices used by the Loan Originator with
respect to each Promissory Note and Mortgage have been in all respects legal, proper, prudent and
customary in the mortgage origination and servicing industry. The Loan has been serviced by the
Loan Originator and any predecessor servicer in accordance with the terms of the Promissory Note.
With respect to escrow deposits and Escrow Payments, if any, all such payments are in the
possession of, or under the control of, the Loan Originator and there exist no deficiencies in
connection therewith for which customary arrangements for repayment thereof have not been made. No
escrow deposits or Escrow Payments or other charges or payments due the Loan Originator have been
capitalized under any Mortgage or the related Promissory Note and no such escrow deposits or Escrow
Payments are being held by the Loan Originator for any work on a Mortgaged Property which has not
been completed;
(xxii) The Mortgaged Property is free of material damage and waste and there is no
proceeding pending for the total or partial condemnation thereof;
(xxiii) The Mortgage contains an enforceable provision for the acceleration of the
payment of the unpaid principal balance of the Loan in the event that the Mortgaged Property is
sold or transferred without the prior written consent of the mortgagee thereunder. The Mortgage and
related Promissory Note contain customary and enforceable provisions such as to render the rights
and remedies of the holder thereof adequate for the realization against the Mortgaged Property of
the benefits of the security provided thereby, including, (a) in the case of a Mortgage designated
as a deed of trust, by trustee’s sale, and (b) otherwise by judicial foreclosure. The Mortgaged
Property has not been subject to any bankruptcy proceeding or foreclosure proceeding and the
Borrower has not filed for protection under applicable bankruptcy laws. No material litigation or
lawsuit relating to the Loan is pending. There is no homestead or other exemption available to the
Borrower which would interfere with the right to sell the Mortgaged Property at a trustee’s sale or
the right to foreclose the Mortgage. The Borrower has not notified the Loan Originator and the Loan
Originator has no knowledge of any relief requested or allowed to the Borrower under the
Servicemembers’ Relief Act of 1940;
(xxiv) The Loan was underwritten in accordance with the Underwriting Guidelines in
effect at the time the Loan was originated; and the Promissory Note and Mortgage are on forms
acceptable to prudent mortgage lending institutions in the secondary market;
(xxv) The Promissory Note is not and has not been secured by any collateral except
the lien of the corresponding Mortgage on the Mortgaged Property and the security interest of any
applicable security agreement or chattel mortgage referred to in (ix) above;
(xxvi) The Loan File contains an appraisal of the related Mortgaged Property which
satisfied the standards of Fannie Mae or Freddie Mac and was made and signed, prior to the approval
of the Loan application, by a qualified appraiser, duly appointed by the Loan Originator, who had
no interest, direct or indirect in the Mortgaged Property or in any loan made on the security
thereof, whose compensation is not affected by the approval or disapproval of the Loan and who met
the minimum qualifications of Fannie Mae or Freddie Mac. Each appraisal of the Loan was made in
accordance with the relevant provisions of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989;
F-4
(xxvii) In the event the Mortgage constitutes a deed of trust, a trustee, duly
qualified under applicable law to serve as such, has been properly designated and currently so
serves and is named in the Mortgage, and no fees or expenses are or will become payable by the
Issuer to the trustee under the deed of trust, except in connection with a trustee’s sale after
default by the Borrower;
(xxviii) No Loan contains provisions pursuant to which Monthly Payments are (a) paid
or partially paid with funds deposited in any separate account established by the Loan Originator,
the Borrower, or anyone on behalf of the Borrower, (b) paid by any source other than the Borrower
or (c) contains any other similar provisions which may constitute a “buydown” provision. The Loan
is not a graduated payment mortgage loan and the Loan does not have a shared appreciation or other
contingent interest feature;
(xxix) The Borrower has executed a statement to the effect that the Borrower has
received all disclosure materials required by applicable law with respect to the making of fixed
rate mortgage loans in the case of fixed-rate Loans, and adjustable rate mortgage loans in the case
of ARMs and rescission materials with respect to Refinanced Loans, and such statement is and will
remain in the Loan File;
(xxx) No Loan was made in connection with (a) the construction or rehabilitation
of a Mortgaged Property or (b) facilitating the trade-in or exchange of a Mortgaged Property;
(xxxi) The Loan Originator has no knowledge of any circumstances or condition with
respect to the Mortgage, the Mortgaged Property, the Borrower or the Borrower’s credit standing
that can reasonably be expected to cause the Loan to be an unacceptable investment, cause the Loan
to become delinquent, or adversely affect the value of the Loan;
(xxxii) Each Loan listed on the Loan Schedule as being subject to a Primary Mortgage
Insurance Policy is and will be subject to a Primary Mortgage Insurance Policy, issued by a
Qualified Insurer, which insures that portion of the Loan in excess of the portion of the Appraised
Value of the Mortgaged Property required by Fannie Mae. All provisions of such Primary Insurance
Policy have been and are being complied with, such policy is in full force and effect, and all
premiums due thereunder have been paid. Any Mortgage subject to any such Primary Insurance Policy
obligates the Borrower thereunder to maintain such insurance and to pay all premiums and charges in
connection therewith. The Loan Interest Rate for the Loan does not include any such insurance
premium;
(xxxiii) The Mortgaged Property is lawfully occupied under applicable law; all
inspections, licenses and certificates required to be made or issued with respect to all occupied
portions of the Mortgaged Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy, have been made or obtained from the
appropriate authorities;
(xxxiv) No error, omission, misrepresentation, negligence, fraud or similar
occurrence with respect to a Loan has taken place on the part of any person, including without
limitation the Borrower, any appraiser, any builder or developer, or any other party involved in
the origination of the Loan or in the application of any insurance in relation to such Loan;
(xxxv) The Assignment of Mortgage is in recordable form and is acceptable for
recording under the laws of the jurisdiction in which the Mortgaged Property is located;
(xxxvi) Any principal advances made to the Borrower prior to the Transfer Cut-off
Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the
secured principal amount, as consolidated, bears a single interest rate and single repayment term.
The lien
F-5
of the Mortgage securing the consolidated principal amount is expressly insured as having first or
second lien priority by a title insurance policy, an endorsement to the policy insuring the
mortgagee’s consolidated interest or by other title evidence acceptable to Fannie Mae and Freddie
Mac. The consolidated principal amount does not exceed the original principal amount of the Loan;
(xxxvii) Except as set forth on the Loan Schedule, no Loan is a Balloon Loan;
(xxxviii) If the residential dwelling on the Mortgaged Property is a condominium unit
or a unit in a planned unit development (other than a de minimis planned unit development) such
condominium or planned unit development project meets the eligibility requirements of Fannie Mae
and Freddie Mac;
(xxxix) Interest on each Loan is calculated on the basis of a 360-day year consisting
of twelve 30-day months;
(xl) The Mortgaged Property is in material compliance with all applicable
environmental laws pertaining to environmental hazards including, without limitation, asbestos, and
neither the Loan Originator nor, to the Loan Orginator’s knowledge, the related Borrower has
received any notice of any violation or potential violation of such law;
(xli) A Trust Receipt reflecting that no Fatal Exceptions exist with respect to
the related Custodial Loan File shall be certified by the Custodian on or before the 15th day
following the related Transfer;
(xlii) The Loan constitutes a “qualified mortgage” within the meaning of Section
860G(a)(3) of the Code;
(xliii) The Loan was not intentionally selected by the Loan Originator in a manner
intended to adversely affect the Noteholders or the Trust;
(xliv) With respect to Second Lien Loans, either (a) no consent for the Loan is
required by the holder of the related first lien or (b) such consent has been obtained and is
contained in the Mortgage File;
(xlv) No Loan is a “High Cost Home Loan” as defined in the Georgia Fair Lending
Act, as amended. No Loan secured by owner occupied real property or an owner occupied manufactured
home located in the State of Georgia was originated (or modified) on or after October 1, 2002
through and including March 6, 2003;
(xlvi) The Loan has been acquired, serviced, collected and otherwise dealt with by
the Loan Originator and any affiliate of the Loan Originator in compliance with all applicable
federal, state and local laws and regulations, including, but not limited to, all applicable
predatory and abusive lending laws and the terms of the related Promissory Note and Mortgage. No
Loan is subject to any federal, state or local law or ordinance that would result in such Loan
being ineligible for inclusion in a rated securitization transaction under the criteria of any
rating agency as in effect as of the application date;
(xlvii) Any and all requirements of any federal, state or local law including,
without limitation, usury, truth in lending, real estate settlement procedures, predatory and
abusive lending, consumer credit protection, equal credit opportunity, fair housing or disclosure
laws applicable to the
F-6
origination and servicing of mortgage loans of a type similar to the Loans have been complied with
in all material respects;
(xlviii) No Loan is (a) subject to the provisions of the Homeownership and Equity
Protection Act of 1994 as amended (“HOEPA”), (b) a “high cost” mortgage loan, “covered” mortgage
loan or “predatory” mortgage loan or any similarly classified loan using different terminology, no
matter how defined under any federal, state or local law imposing heightened regulatory scrutiny or
assignee liability to holders of such mortgage loans, or (c) a High Cost Loan or Covered Loan, as
applicable (as such terms are defined in the current Standard & Poor’s LEVELS® Glossary Revised,
Appendix E);
(xlix) No predatory, abusive, or deceptive lending practices, including but not
limited to, the extension of credit to a mortgagor without regard for the mortgagor’s ability to
repay the Loan and the extension of credit to a mortgagor which has no apparent benefit to the
mortgagor, were employed by the Loan Originator in connection with the origination of the Loan.
Except with respect to escrow deposits, each Points and Fees Loan is in compliance with the
anti-predatory lending eligibility for purchase requirements of the Fannie Mae selling guide;
(l) Points, fees and charges related to each Loan (whether or not financed,
assessed, collected or to be collected in connection with the origination and servicing of each
Loan) were disclosed in writing to the mortgagor in accordance with applicable state and federal
law and regulation. Unless otherwise disclosed on the related Loan Schedule, no mortgagor was
charged “points and fees” (whether or not financed) in an amount greater than 5% of the principal
amount of the related Loan, such 5% limitation is calculated in accordance with Fannie Mae’s
anti-predatory lending requirements as set forth in the Fannie Mae selling guide;
(li) Each Wet Funded Loan was funded under a Closing Protection Letter, to
the extent required by the Loan Originator’s on-line guidelines with respect to Closing Protection
Letters. The Loan Originator will provide a copy of such Closing Protection Letter to Noteholder
Agent upon request.
F-7
EXHIBIT G
SERVICING ADDENDUM
Section 4.01 Duties of the Servicer.
The Servicer, as independent contract servicer, shall service and administer the Loans in
accordance with this Agreement and shall have full power and authority, acting alone, to do or
cause to be done any and all things in connection with such servicing and administration which the
Servicer may deem necessary or desirable and consistent with the terms of this Agreement.
The duties of the Servicer shall include collecting and posting of all payments, responding to
inquiries of Borrowers or by federal, state or local government authorities with respect to the
Loans, investigating delinquencies, reporting tax information to Borrowers in accordance with its
customary practices and accounting for collections and furnishing monthly and annual statements to
the Indenture Trustee and the Noteholder Agent, with respect to distributions, making Servicing
Advances and Monthly Advances pursuant hereto. The Servicer shall follow its customary standards,
policies and procedures in performing its duties as Servicer. The Servicer shall cooperate with the
Indenture Trustee and furnish to the Indenture Trustee with reasonable promptness information in
its possession as may be necessary or appropriate to enable the Indenture Trustee to perform its
tax reporting duties hereunder, if any.
The Servicer shall give prompt notice to the Indenture Trustee and the Noteholder Agent of any
Proceeding, of which the Servicer has actual knowledge, to (i) assert a claim against the Trust or
(ii) assert jurisdiction over the Trust.
In the event of a Disposition or other removal of a Loan from the Trust Estate, the Servicer’s
obligations under this Agreement shall be terminated with respect to such Loan.
The Servicer agrees that in the event that any Notes are outstanding after the applicable
Maturity Date, the Majority Noteholders may appoint a successor servicer in accordance with the
provisions of Section 9.02. The Majority Noteholders may, by written notice to the Servicer and the
Indenture Trustee, elect to have the Servicer continue its duties hereunder after such Maturity
Date.
Consistent with the terms of this Agreement, the Servicer may waive, modify or vary any term
of any Loan or consent to the postponement of strict compliance with any such term or in any manner
grant indulgence to any Borrower if in the Servicer’s reasonable and prudent determination such
waiver, modification, postponement or indulgence is not materially adverse to the Issuer or the
Noteholders; provided, however, that the Servicer shall not permit any modification with respect to
any Loan that would change the Loan Interest Rate, defer or forgive the payment thereof or of any
principal or interest payments, reduce the outstanding principal amount (except for actual payments
of principal), make additional advances of additional principal or extend the final maturity date
on such Loan. Without limiting the generality of the foregoing, the Servicer shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself, and the Issuer, all
instruments of satisfaction or cancellation, or of partial or full release, discharge and all other
comparable instruments, with respect to the Loans and with respect to the Mortgaged Property. If
reasonably required by the Servicer, the Issuer shall furnish the Servicer with any powers of
attorney and other documents necessary or appropriate to enable the Servicer to carry out its
servicing and administrative duties under this Agreement.
The Servicer shall service and administer the Loans in accordance with Accepted Servicing
Practices.
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Section 4.02 Collection of Loan Payments.
Continuously from the date hereof until the principal and interest on all Loans are paid in
full, the Servicer shall proceed diligently to collect all payments due under each Loan when the
same shall become due and payable and shall, to the extent such procedures shall be consistent with
this Agreement and the terms and provisions of any related Primary Insurance Policy, follow such
collection procedures as it follows with respect to mortgage loans comparable to the Loans and held
for its own account. Further, the Servicer shall take special care in ascertaining and estimating
annual ground rents, taxes, assessments, water rates, fire and hazard insurance premiums, mortgage
insurance premiums, and all other charges that, as provided in the Mortgage, will become due and
payable to the end that the installments payable by the Borrowers will be sufficient to pay such
charges as and when they become due and payable.
Section 4.03 Realization Upon Defaulted Loans.
(a) The Servicer shall use its best efforts, consistent with the procedures that the
Servicer would use in servicing loans for its own account, to foreclose upon or otherwise
comparably convert the ownership of such Mortgaged Properties as come into and continue in default
and as to which no satisfactory arrangements can be made for collection of delinquent payments
pursuant to Section 4.01. The Servicer shall use its best efforts to realize upon Defaulted Loans
in such a manner as will maximize the receipt of principal and interest by the Issuer, taking into
account, among other things, the timing of foreclosure proceedings; provided, however, that the
Servicer shall not sell any Defaulted Loan unless it has been directed to do so by the Majority
Noteholder. The foregoing is subject to the provisions that, in any case in which Mortgaged
Property shall have suffered damage, the Servicer shall not be required to expend its own funds
toward the restoration of such property in excess of $2,000 unless it shall determine in its
discretion (i) that such restoration will increase the proceeds of liquidation of the related Loan
to the Issuer after reimbursement to itself for such expenses, and (ii) that such expenses will be
recoverable by the Servicer through Mortgage Insurance Proceeds or Liquidation Proceeds from the
related Mortgaged Property. In the event that any payment due under any Loan is not paid when the
same becomes due and payable, or in the event the Borrower fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable grace period, the
Servicer shall take such action as it shall deem to be in the best interest of the Issuer and the
Noteholders. The Servicer shall notify the Issuer and the Noteholders in writing of the
commencement of foreclosure proceedings. In such connection, the Servicer shall be responsible for
all costs and expenses incurred by it in any such proceedings; provided, however, that it shall be
entitled to reimbursement thereof from the related Mortgaged Property.
(b) Notwithstanding the foregoing provisions of this Section 4.03, with respect to
any Loan as to which the Servicer has received actual notice of, or has actual knowledge of, the
presence of any toxic or hazardous substance on the related Mortgaged Property the Servicer shall
not either (i) obtain title to such Mortgaged Property as a result of or in lieu of foreclosure or
otherwise, or (ii) otherwise acquire possession of, or take any other action, with respect to, such
Mortgaged Property if, as a result of any such action, the Issuer would be considered to hold title
to, to be a mortgagee-in-possession of, or to be an owner or operator of such Mortgaged Property
within the meaning of the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended from time to time, or any comparable law, unless the Servicer has also previously
determined, based on its reasonable judgment and a prudent report prepared by a Person who
regularly conducts environmental audits using customary industry standards, that:
(1) such Mortgaged Property is in compliance with applicable environmental
laws or, if not, that it would be in the best economic interest of the Issuer and the
Noteholders to take such actions as are necessary to bring the Mortgaged Property into
compliance therewith; and
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(2) there are no circumstances present at such Mortgaged Property relating to
the use, management or disposal of any hazardous substances, hazardous materials,
hazardous wastes, or petroleum-based materials for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under any federal,
state or local law or regulation, or that if any such materials are present for which
such action could be required, that it would be in the best economic interest of the
Issuer and the Noteholders to take such actions with respect to the affected Mortgaged
Property.
The cost of the environmental audit report contemplated by this Section 4.03 shall be advanced
by the Servicer, subject to the Servicer’s right to be reimbursed therefor from the Collection
Account as provided in Section 5.01(c).
If the Servicer determines, as described above, that it is in the best economic interest of
the Issuer and the Noteholders to take such actions as are necessary to bring any such Mortgaged
Property into compliance with applicable environmental laws, or to take such action with respect to
the containment, clean-up or remediation of hazardous substances, hazardous materials, hazardous
wastes, or petroleum-based materials affecting any such Mortgaged Property, then the Servicer shall
take such action as it deems to be in the best economic interest of the Issuer and the Noteholders.
The cost of any such compliance, containment, cleanup or remediation shall be advanced by the
Servicer, subject to the Servicer’s right to be reimbursed therefor from the Collection Account as
provided in Section 5.01(c).
(c) The Servicer shall determine, with respect to each Defaulted Loan, when it has
recovered, whether through trustee’s sale, foreclosure sale or otherwise, all amounts it expects to
recover from or on account of such Defaulted Loan, whereupon such Loan shall become a “Liquidated
Loan” and shall promptly deliver to the Noteholder Agent a related liquidation report with respect
to such Liquidated Loan.
Section 4.04 Establishment of Escrow Accounts; Deposits in Escrow Accounts.
The Servicer shall segregate and hold all funds collected and received pursuant to each Loan
which constitute Escrow Payments separate and apart from any of its own funds and general assets
and shall establish and maintain one or more Escrow Accounts, in accordance with the related
Mortgage and applicable law.
The Servicer shall deposit in the Escrow Account or Accounts within two (2) Business Days
after receipt, and retain therein, (i) all Escrow Payments collected on account of the Loans, for
the purpose of effecting timely payment of any such items as required under the terms of this
Agreement, and (ii) all Mortgage Insurance Proceeds which are to be applied to the restoration or
repair of any Mortgaged Property. The Servicer shall make withdrawals therefrom only to effect such
payments as are required under this Agreement, and for such other purposes as shall be as set forth
or in accordance with Section 4.06. The Servicer shall be entitled to retain any interest paid on
funds deposited in the Escrow Account by the depository institution other than interest on escrowed
funds required by law to be paid to the Borrower and, to the extent required by law, the Servicer
shall pay interest on escrowed funds to the Borrower notwithstanding that the Escrow Account is
non-interest bearing or that interest paid thereon is insufficient for such purposes.
Section 4.05 Permitted Withdrawals From Escrow Account.
Withdrawals from the Escrow Account may be made by the Servicer (i) to effect timely payments
of ground rents, taxes, assessments, water rates, hazard insurance premiums, Primary Insurance
Policy premiums, if applicable, and comparable items, (ii) to reimburse the Servicer for any
Servicing Advance made by the Servicer with respect to a related Loan but only from amounts
received on the related Loan
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which represent late payments or collections of Escrow Payments thereunder, (iii) to refund to the
Borrower any funds as may be determined to be overages, (iv) for transfer to the Collection Account
in accordance with the terms of this Agreement, (v) for application to restoration or repair of the
Mortgaged Property, (vi) to pay to the Servicer, or to the Borrower to the extent required by law,
any interest paid on the funds deposited in the Escrow Account, or (vii) to clear and terminate the
Escrow Account on the termination of this Agreement.
Section 4.06 Payment of Taxes, Insurance and Other
Charges; Maintenance of Primary Insurance
Policies; Collections Thereunder.
With respect to each Loan, the Servicer shall maintain accurate records reflecting the status
of ground rents, taxes, assessments, water rates and other charges which are or may become a lien
upon the Mortgaged Property and the status of Primary Insurance Policy premiums and fire and hazard
insurance coverage and shall obtain, from time to time, all bills for the payment of such charges,
including insurance renewal premiums and shall effect payment thereof prior to the applicable
penalty or termination date and at a time appropriate for securing maximum discounts allowable,
employing for such purpose deposits of the Borrower in the Escrow Account which shall have been
estimated and accumulated by the Servicer in amounts sufficient for such purposes, as allowed under
the terms of the Mortgage and applicable law. To the extent that the Mortgage does not provide for
Escrow Payments, the Servicer shall determine that any such insurance premium payments are made by
the Borrower at the time they first become due and any such tax payments are made in time to avoid
loss of the Mortgaged Property in a tax sale. The Servicer assumes full responsibility for the
timely payment of all such bills and shall effect payments of all such bills prior to the
termination of any such insurance coverage or loss of any such Mortgaged Property in a tax sale
irrespective of the Borrower’s faithful performance in the payment of same or the making of the
Escrow Payments and shall make advances from its own funds to effect such payments.
The Servicer shall maintain in full force and effect, a Primary Insurance Policy, issued by a
Qualified Insurer, with respect to each Loan for which such coverage is required. Such coverage
shall be maintained until the Loan-to-Value Ratio of the related Loan is reduced to that amount for
which Fannie Mae no longer requires such insurance to be maintained. The Servicer will not cancel
or refuse to renew any Primary Insurance Policy, if any, in effect on the Closing Date that is
required to be kept in force under this Agreement unless a replacement Primary Insurance Policy, if
any, for such canceled or non-renewed policy is obtained from and maintained with a Qualified
Insurer. The Servicer shall not take any action which would result in non-coverage under any
applicable Primary Insurance Policy of any loss which, but for the actions of the Servicer, would
have been covered thereunder. In connection with any assumption or substitution agreement entered
into or to be entered into pursuant to Section 4.12, the Servicer shall promptly notify the insurer
under the related Primary Insurance Policy, if any, of such assumption or substitution of liability
in accordance with the terms of such policy and shall take all actions which may be required by
such insurer as a condition to the continuation of coverage under the Primary Insurance Policy, if
any. If such Primary Insurance Policy is terminated as a result of such assumption or substitution
of liability, the Servicer shall obtain a replacement Primary Insurance Policy as provided above.
In connection with its activities as servicer, the Servicer agrees to prepare and present, on
behalf of itself, the Issuer and the Noteholders, claims to the insurer under any Primary Insurance
Policy in a timely fashion in accordance with the terms of such policies and, in this regard, to
take such action as shall be necessary to permit recovery under any Primary Insurance Policy
respecting a defaulted Loan. Pursuant to Section 5.01, any amounts collected by the Servicer under
any Primary Insurance Policy shall be deposited in the Collection Account.
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Section 4.07 Transfer of Accounts.
The Servicer may transfer the Collection Account or the Escrow Account to a different
depository institution from time to time. Such transfer shall be made only upon obtaining the
consent of the Noteholder Agent, which consent shall not be unreasonably withheld or delayed. In
any case, the Collection Account and the Escrow Account shall be an Eligible Account.
Section 4.08 Maintenance of Hazard Insurance.
The Servicer shall cause to be maintained for each Loan fire and hazard insurance with
extended coverage as is customary in the area where the Mortgaged Property is located in an amount
which is at least equal to the lesser of (i) 100% of the maximum insurable value of the
improvements securing the Loan or (ii) the outstanding principal balance of the Loan, in each
case in an amount not less than such amount as is necessary to prevent the Borrower and/or the
Issuer from becoming a co- insurer. If the Mortgaged Property is in an area identified on a Flood
Hazard Boundary Map or Flood Insurance Rate Map issued by the Flood Emergency Management Agency as
having special flood hazards and such flood insurance has been made available, the Servicer will
cause to be maintained a flood insurance policy meeting the requirements of the current guidelines
of the Federal Insurance Administration with a generally acceptable insurance carrier, in an amount
representing coverage not less than the lesser of (i) the outstanding principal balance of the Loan
or (ii) the maximum amount of insurance which is available under the National Flood Insurance Act
of 1968 or the Flood Disaster Protection Act of 1973, as amended. The Servicer also shall maintain
on any Foreclosure Property, fire and hazard insurance with extended coverage in an amount which is
at least equal to the lesser of (i) 100% of the maximum insurable value of the improvements which
are a part of such property and (ii) the outstanding principal balance of the related Loan at the
time it became a Foreclosure Property, liability insurance and, to the extent required and
available under the National Flood Insurance Act of 1968 or the Flood Disaster Protection Act of
1973, as amended, flood insurance in an amount as provided above. Pursuant to Section 5.01, any
amounts collected by the Servicer under any such policies other than amounts to be deposited in the
Escrow Account and applied to the restoration or repair of the Mortgaged Property or Foreclosure
Property, or released to the Borrower in accordance with the Servicer’s normal servicing
procedures, shall be deposited in the Collection Account, subject to withdrawal pursuant to Section
5.01. Any cost incurred by the Servicer in maintaining any such insurance shall not, for the
purpose of calculating distributions to the Issuer or the Noteholders, be added to the unpaid
principal balance of the related Loan, notwithstanding that the terms of such Loan so permit. It is
understood and agreed that no earthquake or other additional insurance need be required by the
Servicer or the Borrower or maintained on property acquired in respect of the Loan, other than
pursuant to such applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance. All such policies shall be endorsed with standard mortgagee
clauses with loss payable to the Servicer, or upon the direction of the Noteholder Agent to the
Indenture Trustee, and shall provide for at least thirty days prior written notice of any
cancellation, reduction in the amount of, or material change in, coverage to the Servicer. The
Servicer shall not interfere with the Borrower’s freedom of choice in selecting either his
insurance carrier or agent, provided, however, that the Servicer shall not accept any such
insurance policies from insurance companies unless such companies currently reflect a General
Policy Rating of B:III or better in Best’s Key Rating Guide and are licensed to do business in the
state wherein the property subject to the policy is located.
Section 4.09 Maintenance of Mortgage Impairment Insurance Policy.
In the event that the Servicer shall obtain and maintain a mortgage impairment or blanket
policy issued by an issuer that has a Best rating of B:III insuring against hazard losses on all of
Mortgaged Properties securing the Loans, then, to the extent such policy provides coverage in an
amount equal to the
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amount required pursuant to Section 4.08 and otherwise complies with all other requirements of
Section 4.08, the Servicer shall conclusively be deemed to have satisfied its obligations as set
forth in Section 4.08, it being understood and agreed that such policy may contain a deductible
clause, in which case the Servicer shall, in the event that there shall not have been maintained on
the related Mortgaged Property or Foreclosure Property a policy complying with Section 4.08, and
there shall have been one or more losses which would have been covered by such policy, deposit in
the Collection Account the amount not otherwise payable under the blanket policy because of such
deductible clause. In connection with its activities as servicer of the Loans, the Servicer agrees
to prepare and present, on behalf of the Issuer and the Noteholders, claims under any such blanket
policy in a timely fashion in accordance with the terms of such policy. Upon request of the
Noteholder Agent, the Servicer shall cause to be delivered to the Noteholders a certified true copy
of such policy and a statement from the insurer thereunder that such policy shall in no event be
terminated or materially modified without thirty days prior written notice to the Issuer and the
Noteholders.
Section 4.10 Fidelity Bond, Errors and Omissions Insurance.
The Servicer shall maintain, at its own expense, a blanket fidelity bond and an errors and
omissions insurance policy, with broad coverage with financially responsible companies on all
officers, employees or other persons acting in any capacity with regard to the Loans to handle
funds, money, documents and papers relating to the Loans. The fidelity bond and errors and
omissions insurance shall be in the form of the Mortgage Banker’s Blanket Bond and shall protect
and insure the Servicer against losses, including forgery, theft, embezzlement, fraud, errors and
omissions and negligent acts of such persons. Such fidelity bond shall also protect and insure the
Servicer against losses in
connection with the failure to maintain any insurance policies required pursuant to this
Agreement and the release or satisfaction of a Loan without having obtained payment in full of the
indebtedness secured thereby. No provision of this Section 4.10 requiring the fidelity bond and
errors and omissions insurance shall diminish or relieve the Servicer from its duties and
obligations as set forth in this Agreement. The minimum coverage under any such bond and insurance
policy shall be at least equal to the corresponding amounts required by Fannie Mae in the Fannie
Mae Servicing Guide or by Freddie Mac in the Freddie Mac Sellers’ and Servicers’ Guide. Upon
request of the Noteholder Agent, the Servicer shall cause to be delivered to the Noteholders a
certified true copy of the fidelity bond and insurance policy and a statement from the surety and
the insurer that such fidelity bond or insurance policy shall in no event be terminated or
materially modified without thirty days’ prior written notice to the Noteholder Agent.
Section 4.11 Title, Management and Disposition of Foreclosure Property.
In the event that title to the Mortgaged Property is acquired in foreclosure or by deed in
lieu of foreclosure, the deed or certificate of sale shall be taken in the name of the person
designated by the Issuer, or in the event such person is not authorized or permitted to hold title
to real property in the state where the Foreclosure Property is located, or would be adversely
affected under the “doing business” or tax laws of such state by so holding title, the deed or
certificate of sale shall be taken in the name of such Person or Persons as shall be consistent
with an opinion of counsel obtained by the Servicer from an attorney duly licensed to practice law
in the state where the Foreclosure Property is located. Any Person or Persons holding such title
other than the Issuer shall acknowledge in writing that such title is being held as nominee for the
benefit of the Issuer and the Noteholders.
The Servicer shall either itself or through an agent selected by the Servicer, manage,
conserve, protect and operate each Foreclosure Property (and may temporarily rent the same) in the
same manner that it manages, conserves, protects and operates other foreclosed property for its own
account, and in the same manner that similar property in the same locality as the Foreclosure
Property is managed. If a REMIC election is or is to be made with respect to the arrangement under
which the Mortgage Loans and
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any Foreclosure Property are held, the Servicer shall manage, conserve, protect and operate each
Foreclosure Property in a manner which does not cause such Foreclosure Property to fail to qualify
as “foreclosure property” within the meaning of Section 860G(a)(8) of the Code or result in the
receipt by such REMIC of any “income from non-permitted assets” within the meaning of Section
860F(a)(2)(B) of the Code or any “net income from foreclosure property” within the meaning of
Section 860G(c)(2) of the Code. The Servicer shall cause each Foreclosure Property to be inspected
promptly upon the acquisition of title thereto and shall cause each Foreclosure Property to be
inspected at least annually thereafter. The Servicer shall make or cause to be made a written
report of each such inspection. Such reports shall be retained in the Loan File and copies thereof
shall be forwarded by the Servicer to the Issuer. The Servicer shall use its best efforts to
dispose of the Foreclosure Property as soon as possible. The Servicer shall report monthly to the
Issuer and the Noteholders as to the progress being made in selling such Foreclosure Property, and
if, with the written consent of the Noteholder Agent, a purchase money mortgage is taken in
connection with such sale, such purchase money mortgage shall name the Servicer as mortgagee, and a
separate servicing agreement between the Servicer and the Issuer shall be entered into with respect
to such purchase money mortgage. Notwithstanding the foregoing, if a REMIC election is made with
respect to the arrangement under which the Loans and the Foreclosure Property are held, such
Foreclosure Property shall be disposed of within three years after the end of the tax year in which
such property becomes Foreclosure Property or such other period as may be permitted under Section
860G(a)(8) of the Code.
The final sale by the Servicer of any Foreclosure Property (“REO Disposition”) shall be
carried out by the Servicer at such price and upon such terms and conditions as the Servicer deems
to be in the best interest of the Issuer and the Noteholders only with the prior written consent of
the Noteholder Agent. If as of the date title to any Foreclosure Property was acquired by the
Issuer there were outstanding unreimbursed Servicing Advances with respect to the Foreclosure
Property, the Servicer, upon an REO Disposition of such Foreclosure Property, shall be entitled to
reimbursement for any related unreimbursed Servicing Advances from Liquidation Proceeds received in
connection with such REO Disposition. The Net Liquidation Proceeds from the REO Disposition shall
be deposited in the Collection Account promptly following receipt thereof for distribution on the
succeeding Payment Date in accordance with Section 5.01.
Section 4.12 Assumption Agreements.
The Servicer shall, to the extent it has knowledge of any conveyance or prospective conveyance
by any Borrower of the Mortgaged Property (whether by absolute conveyance or by contract of sale,
and whether or not the Borrower remains or is to remain liable under the Promissory Note and/or the
Mortgage), exercise its rights to accelerate the maturity of such Loan under any “due-on-sale”
clause applicable thereto; provided, however, that the Servicer shall not exercise any such rights
if prohibited by law from doing so or if the exercise of such rights would impair or threaten to
impair any recovery under the related Primary Insurance Policy, if any, and shall not be required
to exercise such rights if the transferee of the Mortgaged Property would qualify for an assumption
or substitution under the Servicer’s underwriting guidelines. If the Servicer reasonably believes
it is unable under applicable law to enforce such “due-on-sale” clause, the Servicer shall enter
into an assumption agreement with the person to whom the Mortgaged Property has been conveyed or is
proposed to be conveyed, pursuant to which such person becomes liable under the Promissory Note
and, to the extent permitted by applicable state law, the Borrower remains liable thereon. Where an
assumption is allowed pursuant to this Section 4.12, the Servicer, with the prior written consent
of the insurer under the Primary Insurance Policy, if any, is authorized to enter into a
substitution of liability agreement with the person to whom the Mortgaged Property has been
conveyed or is proposed to be conveyed pursuant to which the original Borrower is released from
liability and such Person is substituted as Borrower and becomes liable under the related
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Promissory Note. Any such substitution of liability agreement shall be in lieu of an assumption
agreement.
In connection with any such assumption or substitution of liability, the Servicer shall follow
the underwriting practices and procedures of prudent mortgage lenders in the state in which the
related Mortgaged Property is located. With respect to an assumption or substitution of liability,
Loan Interest Rate, the amount of the Monthly Payment, and the final maturity date of such
Promissory Note may not be changed. The Servicer shall notify the Issuer and the Noteholders that
any such substitution of liability or assumption agreement has been completed and shall forward to
the Custodian the original of any such substitution of liability or assumption agreement, which
document shall be added to the related Loan File and shall, for all purposes, be considered a part
of such Loan File to the same extent as all other documents and instruments constituting a part
thereof. Any fee collected by the Servicer for entering into an assumption or substitution of
liability agreement shall be deemed additional Servicing Compensation.
Notwithstanding the foregoing paragraphs of this Section or any other provision of this
Agreement, the Servicer shall not be deemed to be in default, breach or any other violation of its
obligations hereunder by reason of any assumption of a Loan by operation of law or any assumption
which the Servicer may be restricted by law from preventing, for any reason whatsoever. For
purposes of this Section 4.12, the term “assumption” is deemed to also include a sale of the
Mortgaged Property subject to the Mortgage that is not accompanied by an assumption or substitution
of liability agreement.
Section 4.13 Satisfaction of Mortgages and Release of Loan Files.
Upon the payment in full of any Loan, or the receipt by the Servicer of a notification that
payment in full will be escrowed in a manner customary for such purposes, the Servicer will
immediately notify the Issuer and the Noteholder Agent by a certification of a servicing officer of
the Servicer (a “Servicing Officer”), which certification shall include a statement to the effect
that all amounts received or to be received in connection with such payment which are required to
be deposited in the Collection Account pursuant to Section 5.01 have been or will be so deposited,
and shall request execution of any document necessary to satisfy the Loan and delivery to it of the
portion of the Loan File held by Custodian. Upon receipt of a Request for Release and Receipt (as
defined in the Custodial Agreement), the Custodian shall promptly release the related mortgage
documents to the Servicer in accordance with the Custodial Agreement and the Servicer shall prepare
and process any satisfaction or release. No expense incurred in connection with any instrument of
satisfaction or deed of reconveyance shall be chargeable to the Collection Account or the Issuer.
In the event the Servicer satisfies or releases a Mortgage without having obtained payment in
full of the indebtedness secured by the Mortgage or should it otherwise prejudice any right the
Issuer or the Noteholders may have under the mortgage instruments, the Servicer, upon
written demand, shall remit to the Issuer the then outstanding principal balance of the
related Loan by deposit thereof in the Collection Account. The Servicer shall maintain the fidelity
bond insuring the Servicer against any loss it may sustain with respect to any Loan not satisfied
in accordance with the procedures set forth herein.
From time to time and as appropriate for the servicing or foreclosure of the Loan, including
for this purpose collection under any Primary Insurance Policy, the Custodian shall, upon request
of the Servicer and delivery to the Custodian of a servicing receipt signed by a Servicing Officer,
release the requested portion of the Loan File held by the Custodian to the Servicer. Such
servicing receipt shall obligate the Servicer to return the related Mortgage documents to the
Custodian when the need therefor by the Servicer no longer exists, unless the Loan has been
liquidated and the Liquidation Proceeds relating to the Loan have been deposited in the Collection
Account or the Loan File or such document has been delivered to an attorney, or to a public trustee
or other public official as required by law, for
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purposes of initiating or pursuing legal action or other proceedings for the foreclosure of the
Mortgaged Property either judicially or non judicially, and the Servicer has delivered to the
Custodian a certificate of a Servicing Officer certifying as to the name and address of the Person
to which such Loan File or such document was delivered and the purpose or purposes of such
delivery. Upon receipt of a certificate of a Servicing Officer stating that such Loan was
liquidated, the servicing receipt shall be released by the Custodian to the Servicer.
Section 4.14 Advances by the Servicer.
(a) Not later than the close of business on the Business Day preceding each
Remittance Date, the Servicer shall deposit in the Collection Account an amount equal to all
payments not previously advanced by the Servicer, whether or not deferred pursuant to Section 4.01,
of principal (due after the Transfer Cut-off Date) and interest not allocable to the period prior
to the Transfer Cut-off Date, at the Loan Interest Rate net of the Servicing Fee, which were due on
a Loan and delinquent at the close of business on the related Remittance Date; provided, however,
that the Servicer shall not be required to deposit such amount if the amount on deposit in the
Collection Account on that Remittance Date (exclusive of any Monthly Advance required to be
effected pursuant to this Section 4.14) is at least sufficient to fund in full the items described
in Sections 5.01(c)(3)(i) through 5.01(c)(3)(vi) hereof on the related Payment Date, and, if the
amount on deposit in the Collection Account is less than the sum of such items, the Servicer shall
only be required to deposit an amount equal to the shortfall. The obligation of the Servicer to
make such Monthly Advances is mandatory, notwithstanding any other provision of this Agreement,
and, with respect to any Loan or Foreclosure Property, shall continue until a Final Recovery
Determination in connection therewith; provided that, notwithstanding anything herein to the
contrary, no Monthly Advance shall be required to be made hereunder by the Servicer if such Monthly
Advance would, if made, constitute a Nonrecoverable Monthly Advance. The determination by the
Servicer that it has made a Nonrecoverable Monthly Advance or that any proposed Monthly Advance, if
made, would constitute a Nonrecoverable Monthly Advance, shall be evidenced by an Officers’
Certificate delivered to the Issuer and the Indenture Trustee.
(b) The Servicer will pay all out-of-pocket costs and expenses incurred in the
performance of its servicing obligations including, but not limited to, the cost of (i)
Preservation Expenses, (ii) any enforcement or judicial proceedings, including foreclosures, (iii)
inspection fees and expenses and (iv) the management and liquidation of Foreclosure Property but is
only required to pay such costs and expenses to the extent the Servicer reasonably believes such
costs and expenses will increase Net Liquidation Proceeds on the related Loan. Each such amount so
paid will constitute a “Servicing Advance.” The Servicer may recover Servicing Advances (x) from
the Borrowers to the extent permitted by the Loans, from Liquidation Proceeds realized upon the
liquidation of the related Loan and (y) as provided in Sections 5.01(c)(1)(ii) or 5.01(c)(3)(i)
hereof. In no case may the Servicer recover Servicing Advances from principal and interest payments
on any Loan or from any amounts relating to any other Loan except as provided pursuant to Sections
5.01(c)(1)(ii) or 5.01(c)(3)(i) hereof.
Section 4.15 Servicing Compensation.
As compensation for its services hereunder, the Servicer shall, subject to Section 5.01(c), be
entitled to withdraw from the Collection Account or to retain from interest payments on the Loans
the amounts provided for as the Servicer’s Servicing Fee. Additional servicing compensation in the
form of assumption fees, non-sufficient fund fees, modification fees, substitution fees and other
ancillary income, as
provided in Section 4.12, and late payment charges or otherwise shall be retained by the
Servicer to the extent not required to be deposited in the Collection Account. The Servicer shall
be required to pay all expenses incurred by it in connection with its servicing activities
hereunder and shall not be entitled to reimbursement therefor except as specifically provided for.
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Section 4.16 Notification of Adjustments.
On each Adjustment Date, the Servicer shall make interest rate adjustments for each ARM in
compliance with the requirements of the related Mortgage and Promissory Note. The Servicer shall
execute and deliver the notices required by each Mortgage and Promissory Note regarding interest
rate adjustments. The Servicer also shall provide timely notification to the Noteholders of all
applicable data and information regarding such interest rate adjustments and the Servicer’s methods
of implementing such interest rate adjustments. Upon the discovery by the Servicer or the any
Noteholder that the Servicer has failed to adjust a Loan Interest Rate or a Monthly Payment
pursuant to the terms of the related Promissory Note and Mortgage, the Servicer shall immediately
deposit in the Collection Account from its own funds the amount of any interest loss caused thereby
without reimbursement therefor.
Section 4.17 Statement as to Compliance.
The Servicer will deliver to the Issuer, the Indenture Trustee and the Noteholder Agent not
later than 90 days following the end of each fiscal year of the Servicer, which as of the Closing
Date ends on April 30, an Officers’ Certificate stating, as to each signatory thereof, that (i) a
review of the activities of the Servicer during the preceding year and of performance under this
Agreement has been made under such officers’ supervision and (ii) to the best of such officers’
knowledge, based on such review, the Servicer has fulfilled all of its obligations under this
Agreement throughout such year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officer and the nature and status thereof.
Section 4.18 Independent Public Accountants’ Servicing Report.
Not later than 90 days following the end of each fiscal year of the Servicer, the Servicer at
its expense shall cause a firm of independent public accountants (which may also render other
services to the Servicer) which is a member of the American Institute of Certified Public
Accountants to furnish a statement to the Issuer, the Indenture Trustee and the Noteholder Agent to
the effect that such firm has examined certain documents and records relating to the servicing of
the Loans under this Agreement and that, on the basis of such examination conducted substantially
in compliance with the Uniform Single Attestation Program for Mortgage Bankers, such firm confirms
that such servicing has been conducted in compliance with such pooling and servicing agreements
except for such significant exceptions or errors in records that, in the opinion of such firm, the
Uniform Single Attestation Program for Mortgage Bankers requires it to report.
Section 4.19 Access to Certain Documentation
The Servicer shall provide to the Office of Thrift Supervision, the FDIC and any other federal
or state banking or insurance regulatory authority that may exercise authority over the Issuer or
any Noteholder access to the documentation regarding the Loans serviced by the Servicer required by
applicable laws and regulations. Such access shall be afforded without charge, but only upon
reasonable request and during normal business hours at the offices of the Servicer. In addition,
access to the documentation will be provided to the Issuer or any Noteholder and any Person
identified to the Servicer by the Issuer or any Noteholder without charge, upon reasonable request
during normal business hours at the offices of the Servicer.
Section 4.20 Reports and Returns to be Filed by the Servicer.
The Servicer shall file information reports with respect to the receipt of mortgage interest
received in a trade or business, reports of foreclosures and abandonments of any Mortgaged Property
and
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information returns relating to cancellation of indebtedness income with respect to any Mortgaged
Property as required by Sections 6050H, 6050J and 6050P of the Code. Such reports shall be in form
and substance sufficient to meet the reporting requirements imposed by such Sections 6050H, 6050J
and 6050P of the Code.
Section 4.21 Compliance with REMIC Provisions.
If a REMIC election has been made with respect to the arrangement under which the Loans and
Foreclosure Property are held, the Servicer shall not take any action, cause the REMIC to take any
action or fail to take (or fail to cause to be taken) any action that, under the REMIC Provisions,
if taken or not taken, as the case may be, could (i) endanger the status of the REMIC as a REMIC or
(ii) result in the imposition of a tax upon the REMIC (including but not limited to the tax on
“prohibited transactions” as defined in Section 860F(a)(2) of the Code and the tax on
“contributions” to a REMIC set forth in Section 860G(d) of the Code) unless the Servicer has
received an Opinion of Counsel (at the expense of the party seeking to take such action) to the
effect that the contemplated action will not endanger such REMIC status or result in the imposition
of any such tax.
Section 4.22 Subservicing Agreements Between Servicer and Subservicers.
The Servicer may enter into Subservicing Agreements for any servicing and administration of
Loans with any institution which is in compliance with the laws of each state necessary to enable
it to perform its obligations under such Subservicing Agreement and is an Eligible Servicer. The
Servicer shall give notice to the Indenture Trustee and the Noteholder Agent of the appointment of
any Subservicer which is not an Affiliate of the Servicer and shall furnish to the Indenture
Trustee and the Noteholder Agent a copy of the Subservicing Agreement (along with any modifications
thereto) between the Servicer and any Subservicer that is not an Affiliate of the Servicer. For
purposes of this Agreement, the Servicer shall be deemed to have received payments on Loans when
any Subservicer has received such payments. Any such Subservicing Agreement shall be consistent
with and not violate the provisions of this Agreement.
Section 4.23 Successor Subservicers.
Upon notice to the Indenture Trustee and the Noteholder Agent (except if the Subservicer is an
Affiliate of the Servicer), the Servicer shall be entitled to terminate any Subservicing Agreement
in accordance with the terms and conditions of such Subservicing Agreement and to either itself
directly service the related Loans or enter into a Subservicing Agreement with a successor
Subservicer which qualifies under Section 4.22.
Section 4.24 Liability of Servicer.
The Servicer shall not be relieved of its obligations under this Agreement notwithstanding any
Subservicing Agreement or any of the provisions of this Agreement relating to agreements or
arrangements between the Servicer and a Subservicer or otherwise, and the Servicer shall be
obligated to the same extent and under the same terms and conditions as if it alone were servicing
and administering the Loans. The Servicer shall be entitled to enter into any agreement with a
Subservicer for indemnification of the Servicer by such Subservicer and nothing contained in such
Subservicing Agreement shall be deemed to limit or modify this Agreement. The Trust shall not
indemnify the Servicer for any losses due to the Servicer’s negligence.
G-11
Section 4.25 No Contractual Relationship Between Subservicer and Indenture Trustee
or the Securityholders.
Any Subservicing Agreement and any other transactions or services relating to the Loans
involving a Subservicer shall be deemed to be between the Subservicer and the Servicer alone and no
party hereto nor the Securityholders shall be deemed parties thereto and shall have no claims,
rights, obligations, duties or liabilities with respect to any Subservicer except as set forth in
Section 4.26.
Section 4.26 Assumption or Termination of Subservicing Agreement by Successor
Servicer.
In connection with the assumption of the responsibilities, duties and liabilities and of the
authority, power and rights of the Servicer hereunder by a successor Servicer pursuant to Section
9.02, it is understood and agreed that the Servicer’s rights and obligations under any Subservicing
Agreement then in force between the servicer and a Subservicer may be assumed or terminated by the
successor Servicer at its option without the payment of any fee (notwithstanding any contrary
provision in any Subservicing Agreement).
The Servicer shall, upon request of the successor Servicer, but at the expense of the
Servicer, deliver to the assuming party documents and records relating to each Subservicing
Agreement and an accounting of amounts collected and held by it and otherwise use its best
reasonable efforts to effect the orderly and efficient transfer of the Subservicing Agreements to
the assuming party, without the payment of any fee by the successor Servicer, notwithstanding any
contrary provision in any Subservicing Agreement.
Section 4.27 No Predatory Practices
The Servicer shall not engage in any practices or activity, with respect to any of the Loans,
that is predatory, abusive, deceptive or otherwise wrongful under an applicable statute, regulation
or ordinance or that is otherwise actionable.
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EXHIBIT H
CAPITAL ADEQUACY TEST
*To calculate the Total Required Capital for each of the Loan Originator and the Servicer, for each
line item asset below, multiply the HRB% set forth opposite such asset by the applicable Balance
Sheet Amount (set forth as a line item for such asset on the most recent consolidated balance sheet
for the Loan Originator and the Servicer) to determine Required Capital, and the sum of all
Required Capital results shall equal the Total Required Capital (HRB% x Balance Sheet Amount =
Required Capital).
| Asset | HRB% | Balance Sheet Amount | Required Capital | |||||
Unrestricted Cash and Equivalents
|
0 | % | ||||||
Restricted Cash
|
0 | % | ||||||
Loans Held for Sale
|
9 | % | ||||||
Servicing Advances
|
10 | % | ||||||
Beneficial Interests in trusts
|
10 | % | ||||||
Subprime Mortgage NIM Residual Interest
|
60 | % | ||||||
Real Estate Held for Sale
|
10 | % | ||||||
Furniture and Equipment
|
0 | % | ||||||
Mortgage Servicing Rights
|
25 | % | ||||||
Prepaid Expenses and Other Assets
|
10 | % | ||||||
Accrued interest receivable
|
10 | % | ||||||
Receivable from H&R Block
|
0 | % | ||||||
Intangibles and goodwill
|
100 | % | ||||||
Deferred Tax Assets
|
10 | % | ||||||
Derivative Assets
|
10 | % | ||||||
Total Required Capital |
||||||||
H-1
EXHIBIT I
QUARTERLY COMPLIANCE CERTIFICATE
I, , of [OPTION ONE MORTGAGE CORPORATION (the
“Loan Originator”)] [OPTION ONE MORTGAGE CORPORATION (the “Servicer”)], in
accordance with that certain Sale and Servicing Agreement (“Sale and Servicing Agreement”),
dated as of December 30, 2005 by and among Option One Loan Warehouse Corporation, as the Depositor,
Option One Owner Trust 2005-9, as the Issuer, Option One Mortgage Corporation, as the Servicer and
the Loan Originator and Wells Fargo Bank, N.A., as the Indenture Trustee on behalf of the
Noteholders, do hereby certify that:
| i. | Each of the Loan Originator, Depositor and Servicer is in compliance with all provisions and terms of the Sale and Servicing Agreement and all other Loan Documents to which each is a party; | ||
| ii. | [The Loan Originator] [The Servicer], at all times during the preceding calendar quarter, has maintained a ratio of Tangible Net Worth to Total Required Capital (calculated in accordance with Exhibit H to the Sale and Servicing Agreement) of greater than or equal to 1:1; | ||
| iii. | [The Loan Originator] [The Servicer], at all times during the preceding calendar quarter, has maintained a maximum non-warehouse leverage ratio (calculated pursuant to Section 7.02(c) of the Sale and Servicing Agreement) of less than or equal to 1:2; | ||
| iv. | [The Loan Originator] [The Servicer], at all times during the preceding calendar quarter, has maintained a “minimum liquidity facility” (as defined in Section 7.02(d) of the Sale and Servicing Agreement) of not less than $150 million. | ||
| v. | [The Loan Originator] [The Servicer] has not permitted “Net Income” (defined and determined in accordance with GAAP), for the current quarter, together with the preceding, consecutive three fiscal quarters, to be less than $1. |
Capitalized terms used but not defined herein shall have the meanings assigned thereto in the
Sale and Servicing Agreement.
IN WITNESS WHEREOF, I have signed this certificate.
Date: , 20__
| OPTION ONE MORTGAGE CORPORATION, as [Loan Originator] [Servicer] |
||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
[SEAL]
I, , of the [Loan Originator] [Servicer], do hereby
certify that is the duly elected or appointed, qualified and acting
of the [Loan Originator] [Servicer], and the signature set forth above is the
genuine signature of such officer on the date hereof.
I-1
Exhibit 10.7
NOTE PURCHASE AGREEMENT
among
OPTION ONE OWNER TRUST 2005-9
as Issuer
as Issuer
and
OPTION ONE LOAN WAREHOUSE CORPORATION
as Depositor
as Depositor
DB STRUCTURED PRODUCTS, INC.,
as Noteholder Agent
as Noteholder Agent
and
DB STRUCTURED PRODUCTS, INC.,
GEMINI SECURITIZATION CORP., LLC
ASPEN FUNDING CORP.
and
NEWPORT FUNDING CORP.
as Purchasers
GEMINI SECURITIZATION CORP., LLC
ASPEN FUNDING CORP.
and
NEWPORT FUNDING CORP.
as Purchasers
DATED AS OF DECEMBER 30, 2005
OPTION ONE OWNER TRUST 2005-9
MORTGAGE-BACKED NOTES
MORTGAGE-BACKED NOTES
TABLE OF CONTENTS
| Page | ||||
ARTICLE I DEFINITIONS |
1 | |||
Section 10.1 Certain Defined Terms |
1 | |||
Section 1.02 Other Definitional Provisions |
2 | |||
ARTICLE II COMMITMENT; CLOSING AND PURCHASES OF ADDITIONAL NOTE PRINCIPAL BALANCES |
3 | |||
Section 2.01 Commitment |
3 | |||
Section 2.02 Closing |
3 | |||
ARTICLE III TRANSFER DATES |
3 | |||
Section 3.01 Transfer Dates |
3 | |||
ARTICLE IV CONDITIONS PRECEDENT TO EFFECTIVENESS OF COMMITMENT |
5 | |||
Section 4.01 Subject to Conditions Precedent |
5 | |||
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE ISSUER AND THE DEPOSITOR |
7 | |||
Section 5.01 Issuer |
7 | |||
Section 5.02 Securities Act |
9 | |||
Section 5.03 No Fee |
9 | |||
Section 5.04 Information |
10 | |||
Section 5.05 The Purchased Notes |
10 | |||
Section 5.06 Use of Proceeds |
10 | |||
Section 5.07 The Depositor |
10 | |||
Section 5.08 Taxes, etc. |
10 | |||
Section 5.09 Financial Condition |
10 | |||
ARTICLE VI REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE PURCHASERS |
10 | |||
Section 6.01 Organization |
10 | |||
Section 6.02 Authority, etc. |
10 | |||
Section 6.03 Securities Act |
11 | |||
Section 6.04 Conflicts With Law |
11 | |||
Section 6.05 Conflicts with Agreements, etc. |
11 | |||
ARTICLE VII COVENANTS OF THE ISSUER AND THE DEPOSITOR |
12 | |||
Section 7.01 Information from the Issuer |
12 | |||
Section 7.02 Access to Information |
12 | |||
Section 7.03 Ownership and Security Interests; Further Assurances |
12 | |||
Section 7.04 Covenants |
13 | |||
Section 7.05 Amendments |
13 | |||
Section 7.06 With Respect to the Exempt Status of the Purchased Notes |
13 | |||
-i-
TABLE OF CONTENTS
| Page | ||||
ARTICLE VIII ADDITIONAL COVENANTS
|
13 | |||
Section 8.01 Legal Conditions as to Closing
|
13 | |||
Section 8.02 Expenses
|
13 | |||
Section 8.03 Mutual Obligations
|
14 | |||
Section 8.04 Restrictions on Transfer
|
14 | |||
Section 8.05 Reserved
|
14 | |||
Section 8.06 Information Provided by the Noteholder Agent
|
14 | |||
ARTICLE IX INDEMNIFICATION
|
14 | |||
Section 9.01 Indemnification of Purchasers
|
14 | |||
Section 9.02 Procedure and Defense
|
14 | |||
ARTICLE X MISCELLANEOUS
|
15 | |||
Section 10.01 Amendments
|
15 | |||
Section 10.02 Notices
|
15 | |||
Section 10.03 No Waiver, Remedies
|
15 | |||
Section 10.04 Binding Effect; Assignability
|
15 | |||
Section 10.05 Provision of Documents and Information
|
16 | |||
Section 10.06 Governing Law; Jurisdiction
|
16 | |||
Section 10.07 No Proceedings
|
16 | |||
Section 10.08 Execution in Counterparts
|
16 | |||
Section 10.09 No Recourse – Purchasers and Depositor
|
17 | |||
Section 10.10 Survival
|
17 | |||
Section 10.11 Waiver of Set-Off
|
17 | |||
Section 10.12 Tax Characterization
|
17 | |||
Section 10.13 Conflicts
|
18 | |||
Section 10.14 Service of Process
|
18 | |||
Section 10.15 Limitation of Liability
|
18 | |||
Schedule I — Information for Notices |
||||
-ii-
NOTE PURCHASE AGREEMENT
NOTE PURCHASE AGREEMENT dated as of December 30, 2005 (the “Note Purchase
Agreement”), among OPTION ONE OWNER TRUST 2005-9 (the “Issuer”), OPTION ONE LOAN
WAREHOUSE CORPORATION (the “Depositor”), DB STRUCTURED PRODUCTS, INC. (the “Noteholder
Agent” and “Purchaser”), GEMINI SECURITIZATION CORP., LLC, ASPEN FUNDING CORP. and
NEWPORT FUNDING CORP. (the “Purchasers”).
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Certain Defined Terms. Capitalized terms used herein without definition
shall have the meanings set forth in the Indenture and the Sale and Servicing Agreement (as defined
below). Additionally, the following terms shall have the following meanings:
“Closing” shall have the meaning set forth in Section 2.02.
“Closing Date” shall have the meaning set forth in Section 2.02.
“Commitment” means the commitment of the Committed Purchaser to purchase Additional
Note Principal Balances up to the Maximum Committed Note Principal Balance pursuant to Section
2.01.
“Committed Purchaser” means DB Structured Products, Inc. and its permitted successors
and assigns or an Affiliate thereof identified in writing by DB Structured Products, Inc. to the
Indenture Trustee and the other parties hereto, subject to the consent of the Loan Originator,
which may not be unreasonably withheld or delayed.
“Conduit Purchaser” means Gemini Securitization Corp., LLC, Aspen Funding Corp. and/or
Newport Funding Corp., as the case may be.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Governmental Actions” means any and all consents, approvals, permits, orders,
authorizations, waivers, exceptions, variances, exemptions or licenses of, or registrations,
declarations or filings with, any Governmental Authority required under any Governmental Rules.
“Governmental Authority” means the United States of America, any state or other
political subdivision thereof and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government and having jurisdiction over
the applicable Person.
“Governmental Rules” means any and all laws, statutes, codes, rules, regulations,
ordinances, orders, writs, decrees and injunctions, of any Governmental Authority and any and all
legally binding conditions, standards, prohibitions, requirements and judgments of any Governmental
Authority.
“Indemnified Party” means each of the Committed Purchaser, the Conduit Purchasers and
any of their officers, directors, employees, agents, representatives, assignees and Affiliates and
any Person who controls any of the Purchasers or their Affiliates within the meaning of Section 15
of the
Securities Act or Section 20 of the Exchange Act and any provider of liquidity or credit
enhancement to the Conduit Purchaser.
“Indenture” means the Indenture dated as of December 30, 2005 between the Issuer as
Issuer and Wells Fargo Bank, N.A. as Indenture Trustee.
“Investment Company Act” shall have the meaning provided in Section 5.01(i).
“Lien” means, with respect to any asset, (a) any mortgage, lien, pledge, charge,
security interest, hypothecation, option or encumbrance of any kind in respect of such asset or (b)
the interest of a vendor or lessor under any conditional sale agreement, financing lease or other
title retention agreement relating to such asset.
“Loan Originator” means Option One Mortgage Corporation, a California corporation.
“Maximum Committed Note Principal Balance” has the meaning set forth in the Pricing
Letter.
“Maximum Note Principal Balance” has the meaning set forth in the Pricing Letter.
“Pricing Letter” means the Pricing Letter among the Issuer, the Depositor, Option One
and the Indenture Trustee, dated December 30, 2005 and any amendments thereto.
“Purchased Notes” means the Option One Owner Trust 2005-9 Mortgage-Backed Notes issued
by the Issuer pursuant to the Indenture.
“Purchasers” means the Committed Purchaser and the Conduit Purchasers and their
permitted successors and assigns.
“Sale and Servicing Agreement” means the Sale and Servicing Agreement dated as of ,
2005, among the Issuer, the Depositor, the Loan Originator, the Servicer and Wells Fargo Bank, N.A.
as the Indenture Trustee, as the same may be amended, modified or supplemented from time to time.
“Servicer” means Option One Mortgage Corporation or its permitted successors and
assigns.
SECTION 1.02 Other Definitional Provisions.
(a) All terms defined in this Note Purchase Agreement shall have the defined
meanings when used in any certificate or other document made or delivered pursuant hereto unless
otherwise defined therein.
(b) As used herein and in any certificate or other document made or delivered
pursuant hereto or thereto, accounting terms not defined in Section 1.01, and accounting terms
partially defined in Section 1.01 to the extent not defined, shall have the respective meanings
given to them under generally accepted accounting principles. To the extent that the definitions of
accounting terms herein are inconsistent with the meanings of such terms under generally accepted
accounting principles, the definitions contained herein shall control.
(c) The words “hereof,” “herein” and “hereunder” and words of similar import when
used in this Note Purchase Agreement shall refer to this Note Purchase Agreement as a whole and not
to any particular provision of this Note Purchase Agreement; and Section, subsection, Schedule and
Exhibit
2
references contained in this Note Purchase Agreement are references to Sections, subsections,
schedules and Exhibits in or to this Note Purchase Agreement unless otherwise specified.
ARTICLE II
COMMITMENT; CLOSING AND PURCHASES OF
ADDITIONAL NOTE PRINCIPAL BALANCES
ADDITIONAL NOTE PRINCIPAL BALANCES
SECTION 2.01 Commitment.
(a) (i) At any time during the Revolving Period at least two (2) Business Days in
the case of a Loan that is not a Wet Funded Loan, or at least one (1) Business Day, in the case of
a Wet Funded Loan, prior to a proposed Transfer Date, to the extent that the aggregate outstanding
Note Principal Balance (after giving effect to the proposed purchase) is less than the Maximum Note
Principal Balance, and subject to the terms and conditions hereof and in accordance with the other
Basic Documents, the Issuer may request that the Purchasers purchase Additional Note Principal
Balances (each such request, a “Purchase Request”). On the identified Transfer Date, the
Committed Purchaser agrees to purchase the Additional Note Principal Balance requested in the
Purchase Request to the extent that the aggregate outstanding Note Principal Balance (after giving
effect to the proposed purchase) is less than the Maximum Committed Note Principal Balance, subject
to the terms and conditions and in reliance upon the covenants, representations and warranties set
forth herein and in the other Basic Documents; provided however, that the portion of such
Additional Note Principal Balance required to be purchased by the Committed Purchaser shall be
reduced by the amount of such Additional Note Principal Balance that any Conduit Purchaser
purchases pursuant to Section 2.01(a)(ii).
(ii) In the event that a Conduit Purchaser elects, in its sole discretion, to
purchase any Additional Note Principal Balance with respect to any Purchase Request hereunder, such
Conduit Purchaser shall purchase such related Additional Note Principal Balance hereunder and the
amount of Additional Note Principal Balance to be purchased by the Committed Purchaser shall be
reduced by such amount.
(b) Reserved.
SECTION 2.02 Closing. The closing (the “Closing”) of the execution of the
Basic Documents and issuance of the Notes shall take place at 10:00 a.m. at the offices of Thacher
Proffitt & Wood, Two World Financial Center, New York, New York 10281 on December 30, 2005, or if
the conditions to closing set forth in Article IV of this Note Purchase Agreement shall not have
been satisfied or waived by such date, as soon as practicable after such conditions shall have been
satisfied or waived, or at such other time, date and place as the parties shall agree upon (the
date of the Closing being referred to herein as the “Closing Date”).
ARTICLE III
TRANSFER DATES
SECTION 3.01 Transfer Dates.
(a) Subject to the conditions and terms set forth herein and in Section
2.06 of the Sale and Servicing Agreement with respect to each Transfer Date, the Issuer may
request, and the Conduit Purchasers may, and the Committed Purchaser shall (up to the Maximum
Committed Note Principal Balance), purchase Additional Note Principal Balances (up to the Maximum
Note Principal Balance)
3
from the Issuer from time to time in accordance with, and upon the satisfaction, as of the
applicable Transfer Date, of each of the following additional conditions:
(i) With respect to each Transfer Date, each condition set forth in
Section 2.06 of the Sale and Servicing Agreement shall have been satisfied;
(ii) Each of the representations and warranties of the Issuer, the
Servicer, the Loan Originator and the Depositor made in the Basic Documents shall be true and
correct in all material respects as of such date (except to the extent they expressly relate
to an earlier or later time);
(iii) The Issuer, the Servicer, the Loan Originator and the Depositor
shall be in material compliance with all of their respective covenants contained in the Basic
Documents and the Purchased Notes;
(iv) No Event of Default and no Default shall have occurred or shall
be occurring;
(v) With respect to each Transfer Date, the Purchasers and the
Noteholder Agent shall have received evidence reasonably satisfactory to them of the
completion of all recordings, registrations, and filings as may be necessary or, in the
reasonable opinion of the Purchasers, desirable to perfect or evidence the assignments
required to be effected on such Transfer Date in accordance with the Sale and Servicing
Agreement and the Loan Purchase Agreement including, without limitation, the assignment of
the Loans and the proceeds thereof;
(vi) Each Loan (i) has been originated in accordance with the
Underwriting Guidelines and (ii) is not “abusive” or “predatory” as defined in or in
violation of any applicable statutes, regulations, ordinances or in any other way that would
be otherwise actionable by the Borrower or any Governmental Authority;
(vii) With respect to the first Transfer Date, each of the Purchasers
shall have completed their initial due diligence review with respect to the Loans and the
Loan Originator and determined, in such Purchaser’s sole discretion, that both the Loans and
the origination, servicing and business practices of the Loan Originator are reasonably
acceptable to such Purchaser;
(viii) With respect to the first Transfer Date, the Purchasers’ signature
pages to the Master Disposition Confirmation Agreement, together with the revised Schedule I,
Schedule II and Exhibit E thereto, each indicating the addition of the Purchasers as parties
thereto, shall have been delivered to each of the other parties to the Master Disposition
Confirmation Agreement; and
(ix) The Purchasers shall have received, in form and substance
reasonably satisfactory to the Purchasers, an Officer’s Certificate from the Loan Originator,
dated the Closing Date, certifying to the satisfaction of the conditions set forth in the
preceding paragraphs (i), (ii), (iii), (iv), (vi) and (viii).
(b) The price paid by the Purchasers on each Transfer Date for the
Additional Note Principal Balance purchased on such Transfer Date shall be equal to the amount of
such Additional Note Principal Balance and shall be remitted not later than 3:30 p.m. (New York
City time) on the Transfer Date by wire transfer of immediately available funds to the Advance
Account.
4
(c) Each Purchaser shall record on the schedule attached to the Purchased
Notes, the date and amount of any Additional Note Principal Balance purchased by it;
provided, that failure to make such recordation on such schedule or any error in such
schedule shall not adversely affect any Purchaser’s rights with respect to its Note Principal
Balance and any right to receive interest payments in respect of the Note Principal Balance
actually held. Absent manifest error, the Note Principal Balance of the Purchased Notes as set
forth in each Purchaser’s records shall be binding upon the parties hereto, notwithstanding any
notation or record made or kept by any other party hereto.
(d) Each Purchaser shall determine in its reasonable discretion whether
each of the above conditions have been met in accordance with the Sale and Servicing Agreement and
its determination shall be binding on the parties hereto.
ARTICLE IV
CONDITIONS PRECEDENT TO
EFFECTIVENESS OF COMMITMENT
EFFECTIVENESS OF COMMITMENT
SECTION 4.01 Subject to Conditions Precedent. The effectiveness of the Commitment
hereunder is subject to the satisfaction at the time of the Closing of the following conditions
(any or all of which may be waived by the Committed Purchaser in its sole discretion):
(a) Performance by the Issuer, the Depositor, the Servicer and the
Loan Originator. All the terms, covenants, agreements and conditions of the Basic Documents to
be complied with and performed by the Issuer, the Depositor, the Servicer and the Loan Originator
on or before the Closing Date shall have been complied with and performed in all material respects.
(b) Representations and Warranties; Financial Covenants. Each of
the representations and warranties of the Issuer, the Depositor, the Servicer and the Loan
Originator made in the Basic Documents shall be true and correct in all material respects as of the
Closing Date (except to the extent they expressly relate to an earlier or later time).
(c) Officer’s Certificate. The Purchasers shall have received, in
form and substance reasonably satisfactory to the Purchasers, an Officer’s Certificate from the
Loan Originator, the Depositor and the Servicer and a certificate of an Authorized Officer of the
Issuer, dated the Closing Date, certifying to the satisfaction of the conditions set forth in the
preceding paragraphs (a) and (b).
(d) Opinions of Counsel to the Issuer, the Loan Originator, the
Servicer and the Depositor. Counsel to the Issuer, the Loan Originator, the Servicer and the
Depositor shall have delivered to the Purchasers favorable opinions, dated as of the Closing Date
and reasonably satisfactory in form and substance to the Purchasers and their counsel. In addition
to the foregoing, the Loan Originator shall have caused its counsel to deliver to the Purchasers a
favorable opinion to the effect that the Issuer will not be treated as an association (or publicly
traded partnership) taxable as a corporation or as a taxable mortgage pool, for federal income tax
purposes.
(e) Opinions of Counsel to the Indenture Trustee. Counsel to the
Indenture Trustee shall have delivered to the Purchasers a favorable opinion, dated as of the
Closing Date and reasonably satisfactory in form and substance to the Purchasers and their counsel.
(f) Opinions of Counsel to the Owner Trustee. Delaware counsel to
the Owner Trustee of the Issuer and the Depositor shall have delivered to the Purchasers favorable
opinions regarding the formation, existence and standing of the Issuer and the Depositor and of the
Issuer’s and the
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Depositor’s execution, authorization and delivery of each of the Basic Documents to which it is a
party and such other matters as the Purchasers may reasonably request, dated as of the Closing Date
and reasonably satisfactory in form and substance to the Purchasers and their counsel.
(g) Filings and Recordations. Each Purchaser shall have received
evidence reasonably satisfactory to it of (i) the completion of all recordings, registrations, and
filings as may be necessary or, in the reasonable opinion of the Purchasers, desirable to perfect
or evidence the assignment by the Loan Originator to the Depositor of the Loan Originator’s
ownership interest in the Trust Estate including, without limitation, the Loans conveyed pursuant
to the Loan Purchase Agreement and the proceeds thereof, (ii) the completion of all recordings,
registrations and filings as may be necessary or, in the reasonable opinion of the Purchasers,
desirable to perfect or evidence the assignment by the Depositor to the Issuer of the Depositor’s
ownership interest in the Trust Estate including, without limitation, the Loans and the proceeds
thereof and (iii) the completion of all recordings, registrations, and filings as may be necessary
or, in the reasonable opinion of the Purchasers, desirable to perfect or evidence the grant of a
first priority perfected security interest in the Issuer’s ownership interest in the Trust Estate
including, without limitation, the Loans, in favor of the Indenture Trustee, subject to no Liens
prior to the Lien of the Indenture.
(h) Documents. The Purchasers shall have received a duly executed
counterpart of each of the Basic Documents, in form reasonably acceptable to the Purchasers, the
Purchased Notes and each and every document or certification delivered by any party in connection
with any of the Basic Documents or the Purchased Notes, and each such document shall be in full
force and effect.
(i) Due Diligence. Each Purchaser shall have completed its due
diligence review with respect to the Loans, as provided for in Section 11.15 of the Sale and
Servicing Agreement.
(j) Actions or Proceedings. No action, suit, proceeding or
investigation by or before any Governmental Authority shall have been instituted to restrain or
prohibit the consummation of, or to invalidate, any of the transactions contemplated by the Basic
Documents, the Purchased Notes and the documents related thereto in any material respect.
(k) Approvals and Consents. All Governmental Actions of all
Governmental Authorities required with respect to the transactions contemplated by the Basic
Documents, the Purchased Notes and the documents related thereto shall have been obtained or made.
(l) Accounts. Each Purchaser shall have received evidence
reasonably satisfactory to it that each Trust Account has each been established in accordance with
the terms of the Sale and Servicing Agreement.
(m) Fees and Expenses. The fees and expenses payable by the Issuer
and the Depositor pursuant to Section 8.02(b) shall have been paid.
(n) Other Documents. The Issuer, the Loan Originator, the
Depositor and the Servicer shall have furnished to the Purchasers such other opinions, information,
certificates and documents as the Purchasers may reasonably request.
(o) Proceedings in Contemplation of Sale of Purchased Notes. All
actions and proceedings undertaken by the Issuer, the Loan Originator, the Depositor and the
Servicer in connection with the issuance and sale of the Purchased Notes as herein contemplated
shall be reasonably satisfactory in all respects to the Purchasers and their counsel.
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(p) Financial Covenants. The Loan Originator and the Servicer shall be in
compliance with the financial covenants set forth in Section 7.02 of the Sale and Servicing
Agreement.
(q) Underwriting Guidelines. The Purchasers shall have received a copy of the
current Underwriting Guidelines.
(r) Fees. The Loan Originator shall have paid all fees, costs and
expenses of the Purchasers required, by the terms of the Basic Documents, to be paid by the Loan
Originator on or before the Closing Date.
If any condition specified in this Section 4.01 shall not have been fulfilled when and as
required to be fulfilled through no fault of the Purchasers, this Note Purchase Agreement may be
terminated by the Purchasers by notice to the Loan Originator at any time at or prior to the
Closing Date, and the Purchasers shall incur no liability as a result of such termination.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE ISSUER AND THE DEPOSITOR
THE ISSUER AND THE DEPOSITOR
The Issuer and the Depositor hereby jointly and severally make the following representations
and warranties to the Purchasers, as of the Closing Date, and as of each Transfer Date and the
Purchasers shall be deemed to have relied on such representations and warranties in making (or
committing to make) purchases of Additional Note Principal Balances on each Transfer Date:
SECTION 5.01 Issuer.
(a) The Issuer has been duly organized and is validly existing and in good
standing as a statutory trust under the laws of the State of Delaware, with requisite trust power
and authority to own its properties and to transact the business in which it is now engaged, and is
duly qualified to do business and is in good standing (or is exempt from such requirements) in each
State of the United States where the nature of its business requires it to be so qualified and the
failure to be so qualified and in good standing would, individually or in the aggregate, have a
material adverse effect on (a) the interests of the Purchasers, (b) the legality, validity or
enforceability of this Note Purchase Agreement or any other Basic Document or the rights or
remedies of the Purchasers or the Indenture Trustee hereunder or thereunder, (c) the ability of the
Issuer to perform its obligations under this Note Purchase Agreement or any other Basic Document,
(d) the Indenture Trustee’s security interest in the Collateral generally or in any Loan or other
item of Collateral or (e) the enforceability or recoverability of any of the Loans (a “Material
Adverse Effect”).
(b) The issuance, sale, assignment and conveyance of the Purchased Notes
and the Additional Note Principal Balances, the performance of the Issuer’s obligations under each
Basic Document to which it is a party and the consummation of the transactions therein contemplated
will not conflict with or result in a breach of any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any Lien (other than any Lien created by
the Basic Documents), charge or encumbrance upon any of the property or assets of the Issuer or any
of its Affiliates pursuant to the terms of, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which it or any of its Affiliates is bound or to which any of
its property or assets is subject, nor will such action result in any violation of the provisions
of its organizational documents or any Governmental Rule applicable to the Issuer, in each case
which could be expected to have a Material Adverse Effect.
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(c) No Governmental Action which has not been obtained is required by or
with respect to the Issuer in connection with the execution and delivery of the Purchased Notes. No
Governmental Action which has not been obtained is required by or with respect to the Issuer in
connection with the execution and delivery of any of the Basic Documents to which the Issuer is a
party or the consummation by the Issuer of the transactions contemplated thereby except for any
requirements under state securities or “blue sky” laws in connection with any transfer of the
Purchased Notes.
(d) The Issuer possesses all material licenses, certificates,
authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct the business now operated by it, and has not received any notice of
proceedings relating to the revocation or modification of any such license, certificate,
authorization or permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect its condition, financial or
otherwise, or its earnings, business affairs or business prospects.
(e) Each of the Basic Documents to which the Issuer is a party has been
duly authorized, executed and delivered by the Issuer and is a valid and legally binding obligation
of the Issuer, enforceable against the Issuer in accordance with its terms, subject to enforcement
of bankruptcy, insolvency, reorganization, moratorium and other similar laws of general
applicability relating to or affecting creditors’ rights and to general principles of equity.
(f) The execution, delivery and performance by the Issuer of each of its
obligations under each of the Basic Documents to which it is a party will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under, any agreement or
instrument to which the Issuer is a party or by which the Issuer is bound or to which any of its
properties are subject or of any statute, order or regulation applicable to the Issuer of any
court, regulatory body, administrative agency or governmental body having jurisdiction over the
Issuer or any of its properties, in each case which could be expected to have a Material Adverse
Effect.
(g) The Issuer is not in violation of its organizational documents or in
default under any agreement, indenture or instrument which would have a Material Adverse Effect.
The Issuer is not a party to, bound by or in breach or violation of any indenture or other
agreement or instrument, or subject to or in violation of any statute, order or regulation of any
court, regulatory body, administrative agency or governmental body having jurisdiction over the
Issuer that could, individually or in the aggregate, be expected to have a Material Adverse Effect.
(h) There are no actions or proceedings against, or investigations of, the
Issuer pending, or, to the knowledge of the Issuer threatened, before any Governmental Authority,
court, arbitrator, administrative agency or other tribunal (i) asserting the invalidity of any of
the Basic Documents, or (ii) seeking to prevent the issuance of the Purchased Notes or the
consummation of any of the transactions contemplated by the Basic Documents or the Purchased Notes,
or (iii) that, if adversely determined, could, individually or in the aggregate, be expected to
have a Material Adverse Effect.
(i) Neither this Note Purchase Agreement, the other
Basic Documents nor any transaction contemplated herein or therein shall result in a violation
of, or give rise to an obligation on the part of either Purchaser to register, file or give notice
under, Regulations T, U or X of the Federal Reserve Board or any other regulation issued by the
Federal Reserve Board pursuant to the Exchange Act, in each case as in effect on the Closing Date.
(j) The Issuer has all necessary power and authority to execute and
deliver the Purchased Notes. Each Purchased Note has been duly and validly authorized by the Issuer
and, from and after the date on which such Purchased Note is executed by the Issuer and
authenticated by the Indenture
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Trustee in accordance with the terms of the Indenture and delivered to and paid for by the
applicable Purchaser in accordance with the terms of this Note Purchase Agreement, shall be validly
issued and outstanding and shall constitute a valid and legally binding obligation of the Issuer
that is entitled to the benefits of the Indenture and enforceable against the Issuer in accordance
with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors’ rights generally and by general principles of
equity, regardless of whether enforceability is considered in a proceeding in equity or at law.
(k) The Issuer is not, and neither the issuance and sale of the Purchased
Notes to the Purchasers nor the activities of the Issuer pursuant to the Basic Documents, shall
render the Issuer an “investment company” or under the “control” of an “investment company” as such
terms are defined in the Investment Company Act of 1940, as amended (the “Investment Company
Act”).
(l) It is not necessary to qualify the Indenture under the Trust
Indenture Act of 1939, as amended.
(m) The Issuer is solvent and has adequate capital for its business and
undertakings.
(n) The chief executive offices of the Issuer are located at Option One
Owner Trust 2005-9, c/o Wilmington Trust Company, as Owner Trustee, One Rodney Square North, 1100
North Market Street, Wilmington, Delaware 19890, or, with the consent of the Purchasers, such other
address as shall be designated by the Issuer in a written notice to the other parties hereto.
(o) There are no contracts, agreements or understandings between the
Issuer and any Person granting such Person the right to require the filing at any time of a
registration statement under the Act with respect to the Purchased Notes.
(p) No Default or Event of Default exists.
SECTION 5.02 Securities Act. Assuming the accuracy of the representations and
warranties of and compliance with the covenants of the Purchasers, contained herein, the sale of
the Purchased Notes and the sale of Additional Note Principal Balances pursuant to this Note
Purchase Agreement are each exempt from the registration and prospectus delivery requirements of
the Act. In the case of the offer or sale of the Purchased Notes, no form of general solicitation
or general advertising was used by the Issuer, any Affiliates of the Issuer or any person acting on
its or their behalf, including, but not limited to, advertisements, articles, notices or other
communications published in any newspaper, magazine or similar medium or broadcast over television
or radio, or any seminar or meeting whose attendees have been invited by any general solicitation
or general advertising. Neither the Issuer, any Affiliates of the Issuer nor any Person acting on
its or their behalf has offered or sold, nor will the Issuer, any Affiliates of the Issuer or any
Person acting on its behalf offer or sell directly or indirectly, the Purchased Notes or any other
security in any manner that, assuming the accuracy of the representations and warranties and the
performance of the covenants given by the Purchasers and compliance with the applicable provisions
of the Indenture with respect to each transfer of the Purchased Notes, would render the issuance
and sale of the Purchased Notes as contemplated hereby a violation of Section 5 of the Securities
Act or the registration or qualification requirements of any state securities laws, nor has the
Issuer authorized, nor will it authorize, any Person to act in such manner.
SECTION 5.03 No Fee. Neither the Issuer, nor the Depositor, nor any of their
Affiliates has paid or agreed to pay to any Person any compensation for soliciting another to
purchase the Purchased Notes.
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SECTION 5.04 Information. The information provided pursuant to Section 7.01(a) hereof
will, at the date thereof, be true and correct in all material respects.
SECTION 5.05 The Purchased Notes. The Purchased Notes have been duly and validly
authorized, and, when executed and authenticated in accordance with the terms of the Indenture, and
delivered to and paid for in accordance with this Note Purchase Agreement, will be duly and validly
issued and outstanding and will be entitled to the benefits of the Indenture.
SECTION 5.06 Use of Proceeds. No proceeds of a purchase hereunder will be used (i) for
a purpose that violates or would be inconsistent with Regulations T, U or X promulgated by the
Board of Governors of the Federal Reserve System from time to time or (ii) to acquire any security
in any transaction in violation of Section 13 or 14 of the Exchange Act.
SECTION 5.07 The Depositor. The Depositor hereby makes to the Purchasers each of the
representations, warranties and covenants set forth in Section 3.01 of the Sale and Servicing
Agreement as of the Closing Date and as of each Transfer Date (except to the extent that any such
representation, warranty or covenant is expressly made as of another date).
SECTION 5.08 Taxes, etc. Any taxes, fees and other charges of Governmental Authorities
applicable to the Issuer and the Depositor, except for franchise or income taxes, in connection
with the execution, delivery and performance by the Issuer and the Depositor of each Basic Document
to which they are parties, the issuance of the Purchased Notes or otherwise applicable to the
Issuer or the Depositor in connection with the Trust Estate have been paid or will be paid by the
Issuer or the Depositor, as applicable, at or prior to the Closing Date or Transfer Date, to the
extent then due.
SECTION 5.09 Financial Condition. On the date hereof and on each Transfer Date,
neither the Issuer nor the Depositor is or will be insolvent or the subject of any voluntary or
involuntary bankruptcy proceeding.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO THE PURCHASERS
WITH RESPECT TO THE PURCHASERS
Each Purchaser hereby makes the following representations and warranties as to itself as of
the Closing Date to the Issuer and the Depositor on which the same are relying in entering into
this Note Purchase Agreement.
SECTION 6.01 Organization. Each Purchaser has been duly organized and is validly
existing and in good standing under the laws of the jurisdiction of its organization with power and
authority to own its properties and to transact the business in which it is now engaged.
SECTION 6.02 Authority, etc. Each Purchaser has all requisite power and authority to
enter into and perform its obligations under this Note Purchase Agreement and to consummate the
transactions herein contemplated. The execution and delivery by the Purchasers of this Note
Purchase Agreement and the consummation by the Purchasers of the transactions contemplated hereby
have been duly and validly authorized by all necessary organizational action on the part each
Purchaser. This Note Purchase Agreement has been duly and validly executed and delivered by the
Purchasers and constitutes a legal, valid and binding obligation of each Purchaser, enforceable
against each Purchaser in accordance with its terms, subject to enforcement of bankruptcy,
reorganization, insolvency, moratorium and other similar laws of general applicability relating to
or affecting creditors’ rights and to general principles of
10
equity. Neither the execution and delivery by the Purchasers of this Note Purchase Agreement nor
the consummation by the Purchasers of any of the transactions contemplated hereby, nor the
fulfillment by the Purchasers of the terms hereof, will conflict with, or violate, result in a
breach of or constitute a default under any term or provision of such Purchaser’s organizational
documents or any Governmental Rule applicable to such Purchaser.
SECTION 6.03 Securities Act. The Purchasers hereby represents and warrants to the
Issuer and the Depositor as of the date of this Note Purchase Agreement, as follows:
(a) Each Purchaser has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of the purchase of an interest
in the Note. Each Purchaser (i) is (A) a “qualified institutional buyer” as defined under Rule 144A
promulgated under the Securities Act of 1933, as amended (the “1933 Act”), acting for its own
account or the accounts of other “qualified institutional buyers” as defined under Rule 144A, or
(B) an “accredited investor” within the meaning of Regulation D promulgated under the 1933 Act, and
(ii) is aware that the Issuer intends to rely on the exemption from registration requirements under
the 1933 Act provided by Rule 144A or Regulation D, as applicable.
(b) Each Purchaser understands that neither the Note nor interests in the
Note have been registered or qualified under the 1933 Act, nor under the securities laws of any
state, and therefore neither the Note nor interests in the Note can be resold unless they are
registered or qualified thereunder or unless an exemption from registration or qualification is
available.
(c) It is the intention of each Purchaser to acquire interests in the Note
(a) for investment for its own account, or (b) for resale to “qualified institutional buyers” in
transactions under Rule 144A, and not in any event with the view to, or for resale in connection
with, any distribution thereof. The Purchasers understand that the Note and interests therein have
not been registered under the 1933 Act by reason of a specific exemption from the registration
provisions of the 1933 Act which depends upon, among other things, the bona fide nature of each
Purchaser’s investment intent (or intent to resell only in Rule 144A transactions) as expressed
herein.
SECTION 6.04 Conflicts With Law. The execution, delivery and performance by each
Purchaser of its obligations under this Note Purchase Agreement will not result in a breach or
violation of any of the terms or provisions of, or constitute a default under, any agreement or
instrument to which each such Purchaser is a party or by which each such Purchaser is bound or of
any statute, order or regulation applicable to each such Purchaser of any court, regulatory body,
administrative agency or governmental body having jurisdiction over each such Purchaser, in each
case which could be expected to have a material adverse effect on the transactions contemplated
therein.
SECTION 6.05 Conflicts With Agreements, etc. Each Purchaser is not in violation of its
organizational documents or in default under any agreement, indenture or instrument the effect of
which violation or default would be materially adverse to the Purchaser in the performance of its
obligations or duties under any of the Basic Documents to which it is a party. Each Purchaser is
not a party to, bound by or in breach or violation of any indenture or other agreement or
instrument, or subject to or in violation of any statute, order or regulation of any court,
regulatory body, administrative agency or governmental body having jurisdiction over each such
Purchaser that materially and adversely affects, the ability of each Purchaser to perform its
obligations under this Note Purchase Agreement.
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ARTICLE VII
COVENANTS OF THE ISSUER AND THE DEPOSITOR
SECTION 7.01 Information from the Issuer. So long as the Purchased Notes remain
outstanding, the Issuer and the Depositor shall each furnish to the Purchasers:
(a) the financial information required to be delivered by the Servicer
under Section 4.02(a) of the Sale and Servicing Agreement;
(b) such information (including financial information), documents, records
or reports with respect to the Trust Estate, the Loans, the Issuer, the Loan Originator, the
Servicer or the Depositor as the Purchasers may from time to time reasonably request;
(c) as soon as possible and in any event within two (2) Business Days
after the occurrence thereof, notice of each Event of Default under the Sale and Servicing
Agreement or the Indenture, and each Default; and
(d) promptly and in any event within thirty (30) days after the occurrence
thereof, written notice of a change in address of the chief executive office of the Issuer, the
Loan Originator or the Depositor.
SECTION 7.02 Access to Information. So long as the Purchased Notes remain outstanding,
each of the Issuer and the Depositor shall, at any time and from time to time during regular
business hours, or at such other reasonable times upon reasonable notice to the Issuer or the
Depositor, as applicable, permit the Purchasers, or their agents or representatives to:
(a) examine all books, records and documents (including computer tapes and
disks) in the possession or under the control of the Issuer or the Depositor relating to the Loans
or the Basic Documents as may be requested, and
(b) visit the offices and property of the Issuer and the Depositor for the
purpose of examining such materials described in clause (a) above.
Except as provided in Section 10.05, information obtained by the Purchasers pursuant to this
Section 7.02 and Section 7.01 herein shall be held in confidence in accordance with and to the
extent provided in Sections 11.15 and 11.17 of the Sale and Servicing Agreement as if it
constituted “Confidential Information” (as defined therein).
SECTION 7.03 Ownership and Security Interests; Further Assurances. The Depositor will
take all action necessary to maintain the Issuer’s ownership interest in the Loans and the other
items sold pursuant to Article II of the Sale and Servicing Agreement. The Issuer will take all
action necessary to maintain the Indenture Trustee’s security interest in the Loans and the other
items pledged to the Indenture Trustee pursuant to the Indenture.
The Issuer and the Depositor agree to take any and all acts and to execute any and all further
instruments reasonably necessary or requested by the Purchasers to more fully effect the purposes
of this Note Purchase Agreement.
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SECTION 7.04 Covenants. The Issuer and the Depositor shall each duly observe and
perform each of their respective covenants set forth in each of the Basic Documents to which they
are a party.
SECTION 7.05 Amendments. Neither the Issuer nor the Depositor shall make, nor permit
any Person to make, any amendment, modification or change to, or provide any waiver under any Basic
Document to which the Issuer or the Depositor, as applicable, is a party without the prior written
consent of the Purchasers.
SECTION 7.06 With Respect to the Exempt Status of the Purchased Notes.
(a) Neither the Issuer nor the Depositor, nor any of their respective
Affiliates, nor any Person acting on their behalf will, directly or indirectly, make offers or
sales of any security, or solicit offers to buy any security, under circumstances that would
require the registration of the Purchased Notes under the Securities Act.
(b) Neither the Issuer nor the Depositor, nor any of their Affiliates, nor
any Person acting on their behalf will engage in any form of general solicitation or general
advertising (within the meaning of Regulation D promulgated under the Securities Act) in connection
with any offer or sale of the Purchased Notes.
(c) On or prior to any Transfer Date, the Issuer and the Depositor will
furnish or cause to be furnished to the Purchasers and any subsequent purchaser therefrom of
Additional Note Principal Balance, if the Purchasers or any such subsequent purchaser so request, a
letter from each Person furnishing a certificate or opinion on the Closing Date as described in
Section 4.01 hereof or on or before any such Transfer Date in which such Person shall state that
such subsequent purchaser may rely upon such original certificate or opinion as though delivered
and addressed to such subsequent purchaser and made on and as of the Closing Date or such Transfer
Date, as the case may be, except for such exceptions set forth in such letter as are attributable
to events occurring after the Closing Date or such Transfer Date.
ARTICLE VIII
ADDITIONAL COVENANTS
SECTION 8.01 Legal Conditions to Closing. The parties hereto will take all reasonable
action necessary to obtain (and will cooperate with one another in obtaining) any consent,
authorization, permit, license, franchise, order or approval of, or any exemption by, any
Governmental Authority or any other Person, required to be obtained or made by it in connection
with any of the transactions contemplated by this Note Purchase Agreement.
SECTION 8.02 Expenses.
(a) The Issuer and the Depositor jointly and severally covenant that,
whether or not the Closing takes place, except as otherwise expressly provided herein, all
reasonable costs and expenses incurred in connection with this Note Purchase Agreement and the
transactions contemplated hereby shall be paid by the Issuer or the Depositor.
(b) The Issuer and the Depositor jointly and severally covenant to pay as
and when billed by the Purchasers, subject to the applicable limit on Due Diligence Fees set forth
in Section 11.15 of the Sale and Servicing Agreement, all of the reasonable out-of-pocket costs and
expenses incurred in
13
connection with the consummation and administration of the transactions contemplated hereby and in
the other Basic Documents including, without limitation, (i) all reasonable fees, disbursements and
expenses of counsel to the Purchasers, (ii) all reasonable fees and expenses of the Indenture
Trustee and the Owner Trustee and their counsel and (iii) all reasonable fees and expenses of the
Custodian and its counsel.
SECTION 8.03 Mutual Obligations. On and after the Closing, each party hereto will do,
execute and perform all such other acts, deeds and documents as any other party hereto may from
time to time reasonably require in order to carry out the intent of this Note Purchase Agreement.
SECTION 8.04 Restrictions on Transfer. Each Purchaser agrees that it will comply with
the restrictions on transfer of the Purchased Notes set forth in the Indenture and will resell the
Purchased Notes only in compliance with such restrictions.
SECTION 8.05 Reserved.
SECTION 8.06 Information Provided by the Noteholder Agent. The Noteholder Agent hereby
covenants to determine One-Month LIBOR in accordance with the definition thereof in the Basic
Documents and shall give notice to the Indenture Trustee, the Issuer and the Depositor of the
Interest Payment Amount on each Determination Date. The Noteholder Agent shall cause the Market
Value Agent to give notice to the Indenture Trustee, the Issuer and the Depositor of any Hedge
Funding Requirement (if any) on or before the Determination Date related to any Payment Date. In
addition, on each Determination Date, the Noteholder Agent hereby covenants to give notice to the
Indenture Trustee, the Issuer and the Depositor of (i) the Issuer/Depositor Indemnities (as defined
in the Trust Agreement), (ii) Due Diligence Fees and (iii) the Collateral Value for each Loan for
the related Payment Date.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01 Indemnification of Purchasers. Each of the Issuer and the Depositor
hereby agree to, jointly and severally, indemnify and hold harmless each Indemnified Party against
any and all losses, claims, damages, liabilities, reasonable expenses or judgments (including
reasonable accounting fees and reasonable legal fees and other reasonable expenses incurred in
connection with this Note Purchase Agreement or any other Basic Document and any action, suit or
proceeding or any claim asserted) (collectively, “Losses”), as incurred (payable promptly
upon written request), for or on account of or arising from or in connection with any information
prepared by and furnished or to be furnished by any of the Issuer, the Loan Originator or the
Depositor pursuant to or in connection with the transactions contemplated hereby including, without
limitation, such written information as may have been and may be furnished in connection with any
due diligence investigation with respect to the business, operations, financial condition of the
Issuer, the Loan Originator, the Depositor or with respect to the Loans, to the extent such
information contains any untrue statement of material fact or omits to state a material fact
necessary to make the statements contained therein in the light of the circumstances under which
such statements were made not misleading, except with respect to any such information used by such
Indemnified Party in violation of the Basic Documents or as a result of an Indemnified Party’s
gross negligence or willful misconduct which results in such Losses. The indemnities contained in
this Section 9.01 will be in addition to any liability which the Issuer or the Depositor may
otherwise have pursuant to this Note Purchase Agreement and any other Basic Document.
SECTION 9.02 Procedure and Defense. In case any action or proceeding (including any
governmental or regulatory investigation or proceeding) shall be instituted involving any
Indemnified Party in respect of which indemnity may be sought pursuant to Section 9.01, such
Indemnified Party shall
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promptly notify the Issuer and the Depositor in writing and, upon request of the Indemnified Party,
the Issuer and the Depositor shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to such Indemnified Party to represent such Indemnified Party and any
others the indemnifying party may designate and shall pay the reasonable fees and disbursements of
such counsel related to such proceeding; provided that failure to give such notice or deliver such
documents shall not affect the rights to indemnity hereunder unless such failure materially
prejudices the rights of the Indemnified Party. The Indemnified Party will have the right to employ
its own counsel in any such action in addition to the counsel of the Issuer and/or the Depositor,
but the reasonable fees and expenses of such counsel will be at the expense of such Indemnified
Party, unless (i) the employment of counsel by the Indemnified Party at its expense has been
authorized in writing by the Depositor or the Issuer, (ii) the Depositor or the Issuer has not in
fact employed counsel to assume the defense of such action within a reasonable time after receiving
notice of the commencement of the action or (iii) the named parties to any such action or
proceeding (including any impleaded parties) include the Depositor or the Issuer and one or more
Indemnified Parties, and the Indemnified Parties shall have been advised by counsel that there may
be one or more legal defenses available to them which are different from or additional to those
available to the Depositor or the Issuer. Reasonable expenses of counsel to any Indemnified Party
for which the Issuer and the Depositor are responsible hereunder shall be reimbursed by the Issuer
and the Depositor as they are incurred. The Issuer and the Depositor shall not be liable for any
settlement of any proceeding affected without its written consent, but if settled with such consent
or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the
Indemnified Party from and against any loss or liability by reason of such settlement or judgment.
Neither the Issuer nor the Depositor will, without the prior written consent of the Indemnified
Party, effect any settlement of any pending or threatened proceeding in respect of which any
Indemnified Party is or could have been a party and indemnity could have been sought hereunder by
such Indemnified Party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of such proceeding.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 Amendments. No amendment or waiver of any provision of this Note
Purchase Agreement shall in any event be effective unless the same shall be in writing and signed
by all of the parties hereto, and then such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
SECTION 10.02 Notices. All notices and other communications provided for hereunder
shall, unless otherwise stated herein, be in writing (including telecopies) and mailed, telecopied
(with a copy delivered by overnight courier) or delivered, as to each party hereto, at its address
as set forth in Schedule I hereto or at such other address as shall be designated by such party in
a written notice to the other parties hereto. All such notices and communications shall be deemed
effective upon receipt thereof, and in the case of telecopies, when receipt is confirmed by
telephone.
SECTION 10.03 No Waiver; Remedies. No failure on the part of any party hereto to
exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right hereunder preclude any other or further exercise
thereof or the exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 10.04 Binding Effect; Assignability.
15
(a) This Note Purchase Agreement shall be binding upon and inure to the
benefit of the Issuer, the Depositor and the Purchasers and their respective permitted successors
and assigns (including any subsequent holders of the Purchased Notes); provided, however, neither
the Issuer nor the Depositor shall have any right to assign their respective rights hereunder or
interest herein (by operation of law or otherwise) without the prior written consent of the
Purchasers.
(b) The Purchasers may, in the ordinary course of its business and in
accordance with the Basic Documents and applicable law, including applicable securities laws, at
any time sell to one or more Persons (each, a “Participant”), participating interests in
all or a portion of its rights and obligations under this Note Purchase Agreement. Notwithstanding
any such sale by the Purchasers of participating interests to a Participant, the Purchasers’ rights
and obligations under this Note Purchase Agreement shall remain unchanged, the Purchasers shall
remain solely responsible for the performance thereof, and the Issuer and the Depositor shall
continue to deal solely and directly with the Purchasers and shall have no obligations to deal with
any Participant in connection with the Purchasers’ rights and obligations under this Note Purchase
Agreement.
(c) This Note Purchase Agreement shall create and constitute the
continuing obligation of the parties hereto in accordance with its terms, and shall remain in full
force and effect until such time as all amounts payable with respect to the Purchased Notes shall
have been paid in full.
SECTION 10.05 Provision of Documents and Information. Each of the Issuer and the
Depositor acknowledges and agrees that each Purchaser is permitted to provide to any subsequent
purchaser, permitted assignees and Participants, opinions, certificates, documents and other
information relating to the Issuer, the Depositor and the Loans delivered to each Purchaser
pursuant to this Note Purchase Agreement provided that with respect to Confidential Information,
such subsequent purchaser, permitted assignees and Participants agree to be bound by Section 7.02
hereof.
SECTION 10.06 GOVERNING LAW; JURISDICTION. THIS NOTE PURCHASE AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE
TO ITS CONFLICT OF LAW PROVISIONS OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW. EACH OF
THE PARTIES TO THIS NOTE PURCHASE AGREEMENT HEREBY AGREES TO THE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND ANY APPELLATE COURT HAVING JURISDICTION TO
REVIEW THE JUDGMENTS THEREOF. EACH OF THE PARTIES TO THIS NOTE PURCHASE AGREEMENT HEREBY WAIVES ANY
OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED
HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.
SECTION 10.07 No Proceedings. Until the date that is one year and one day after the
last day on which any amount is outstanding under this Note Purchase Agreement, the Depositor and
the Purchasers hereby covenant and agree that they will not institute against the Issuer or the
Depositor or the Conduit Purchaser, or join in any institution against the Issuer or the Depositor
or the Conduit Purchaser of, any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any United States federal or state bankruptcy or similar
law.
SECTION 10.08 Execution in Counterparts. This Note Purchase Agreement may be executed
in any number of counterparts and by different parties hereto in separate counterparts, each of
16
which when so executed shall be deemed to be an original and all of which when taken together shall
constitute one and the same agreement.
SECTION 10.09 No Recourse — Purchasers and Depositor.
(a) The obligations of the Purchasers under this Note Purchase Agreement,
or any other agreement, instrument, document or certificate executed and delivered by or issued by
the Purchasers or any officer thereof are solely the limited liability company or corporate
obligations of the Purchasers, as the case may be. No recourse shall be had for payment of any fee
or other obligation or claim arising out of or relating to this Note Purchase Agreement or any
other agreement, instrument, document or certificate executed and delivered or issued by the
Purchasers or any officer thereof in connection therewith, against any stockholder, limited
partner, employee, officer, director or incorporator of the Purchasers.
(b) The obligations of the Depositor under this Note Purchase Agreement,
or any other agreement, instrument, document or certificate executed and delivered by or issued by
the Depositor or any officer thereof are solely the partnership or corporate obligations of the
Depositor, as the case may be. No recourse shall be had for payment of any fee or other obligation
or claim arising out of or relating to this Note Purchase Agreement or any other agreement,
instrument, document or certificate executed and delivered or issued by the Depositor or any
officer thereof in connection therewith, against any stockholder, limited partner, employee,
officer, director or incorporator of the Depositor.
(c) The Purchasers, by accepting the Purchased Notes, acknowledge that
such Purchased Notes represent an obligation of the Issuer and do not represent an interest in or
an obligation of the Loan Originator, the Servicer, the Depositor, the Administrator, the Owner
Trustee, the Indenture Trustee or any Affiliate thereof and no recourse may be had against such
parties or their assets, except as may be expressly set forth or contemplated in this Note Purchase
Agreement, the Purchased Notes or the Basic Documents.
SECTION 10.10 Survival. All representations, warranties, covenants, guaranties and
indemnifications contained in this Note Purchase Agreement and in any document, certificate or
statement delivered pursuant hereto or in connection herewith shall survive the sale, transfer or
repayment of the Purchased Notes and the termination of this Note Purchase Agreement.
SECTION 10.11 Waiver of Set-Off. All payments due to Noteholders hereunder and under
any of the Basic Documents, including without limitation all payments on account of principal,
interest and fees, if any, shall be made to the Noteholders, without set-off, recoupment or
counterclaim, and each of the Depositor and the Issuer hereby waive any and all right of set-off,
recoupment or counterclaim hereunder or under any of the Basic Documents.
SECTION 10.12 Tax Characterization. Each party to this Note Purchase Agreement (a)
acknowledges and agrees that it is the intent of the parties to this Note Purchase Agreement that
for all purposes, including federal, state and local income, single business and franchise tax
purposes, the Purchased Notes will be treated as evidence of indebtedness secured by the Loans and
proceeds thereof and the trust created under the Indenture will not be characterized as an
association (or publicly traded partnership) taxable as a corporation, (b) agrees to treat the
Purchased Notes for federal, state and local income and franchise tax purposes as indebtedness and
(c) agrees that the provisions of all Basic Documents shall be construed to further these
intentions of the parties.
17
SECTION 10.13 Conflicts. Notwithstanding anything contained herein to the contrary, in
the event of the conflict between the terms of the Sale and Servicing Agreement and this Note
Purchase Agreement, the terms of the Sale and Servicing Agreement shall control.
SECTION 10.14 Service of Process. Each of the Depositor and the Issuer agrees that
until such time as the Purchased Notes have been paid in full, each such party shall have appointed
an agent registered with the Secretary of State of the State of New York, with an office in the
County of New York in the State of New York, as its true and lawful attorney and duly authorized
agent for acceptance of service of legal process. Each of the Depositor and the Issuer agrees that
service of such process upon such person shall constitute personal service of such process upon it.
SECTION 10.15 Limitation on Liability. It is expressly understood and agreed by the
parties hereto that (a) this Note Purchase Agreement is executed and delivered by Wilmington Trust
Company, not individually or personally, but solely as Owner Trustee of Option One Owner Trust
2005-9, in the exercise of the powers and authority conferred and vested in it, (b) each of the
representations, undertakings and agreements herein made on the part of the Issuer is made and
intended not as personal representations, undertakings and agreements by Wilmington Trust Company
but is made and intended for the purpose for binding only the Issuer, (c) nothing herein contained
shall be construed as creating any liability on Wilmington Trust Company, individually or
personally, to perform any covenant either expressed or implied contained herein, all such
liability, if any, being expressly waived by the parties hereto and by any Person claiming by,
through or under the parties hereto and (d) under no circumstances shall Wilmington Trust Company
be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for
the breach or failure of any obligation, representation, warranty or covenant made or undertaken by
the Issuer under this Note Purchase Agreement or any other related documents.
[Signature Page Follows]
18
IN WITNESS WHEREOF, the parties have caused this Note Purchase Agreement to be executed by
their respective officers hereunto duly authorized, as of the date first above written.
| OPTION ONE OWNER TRUST 2005-9 | |||||
| By: | Wilmington Trust Company, not in its individual | ||||
| capacity but solely as owner trustee | |||||
| By: | /s/ | ||||
| Name: | Joann A. Rozell | ||||
| Title: | Assistant Vice President | ||||
| OPTION ONE LOAN WAREHOUSE CORPORATION | |||||
| By: | /s/ | ||||
| Name: | Charles R. Fulton | ||||
| Title: | Assistant Secretary | ||||
| DB STRUCTURED PRODUCTS, INC., | |||||
| as Noteholder Agent and Committed Purchaser | |||||
| By: | /s/ | ||||
| Name: | Glenn Minkoff | ||||
| Title: | Director | ||||
| By: | /s/ | ||||
| Name: | John McCarthy | ||||
| Title: | Authorized Signatory | ||||
| GEMINI SECURITIZATION CORP., LLC, | |||||
| as Conduit Purchaser | |||||
| By: | /s/ | ||||
| Name: | R. Douglas Donaldson | ||||
| Title: | Treasurer | ||||
| ASPEN FUNDING CORP., as Conduit Purchaser | |||||
| By: | /s/ | ||||
| Name: | Doris J. Hearn | ||||
| Title: | Vice President | ||||
| NEWPORT FUNDING CORP., as Conduit Purchaser | |||||
| By: | /s/ | ||||
| Name: | Doris J. Hearn | ||||
| Title: | Vice President | ||||
Note Purchase Agreement
Schedule I
Information for Notices
Information for Notices
if to the Issuer:
Option One Owner Trust 2005-9
c/o Wilmington Trust Company
as Owner Trustee
One Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Attention: Corporate Trust Administration
Telecopy: (302) 636-4144
Telephone: (302) 636-1000
c/o Wilmington Trust Company
as Owner Trustee
One Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Attention: Corporate Trust Administration
Telecopy: (302) 636-4144
Telephone: (302) 636-1000
with a copy to:
Option One Mortgage Corporation
3 Ada Road
Irvine, California 92618
Attention: William O’Neill
Telecopy number: (949) 790-7540
Telephone number: (949) 790-7504
3 Ada Road
Irvine, California 92618
Attention: William O’Neill
Telecopy number: (949) 790-7540
Telephone number: (949) 790-7504
if to the Depositor:
Option One Loan Warehouse Corporation
3 Ada Road
Irvine, California 92618
Attention: William O’Neill
Telecopy number: (949) 790-7540
Telephone number: (949) 790-7504
3 Ada Road
Irvine, California 92618
Attention: William O’Neill
Telecopy number: (949) 790-7540
Telephone number: (949) 790-7504
if to the Purchasers:
60 Wall Street
New York, NY 10005
Attention: Glenn Minkoff
Telecopy number: (212) 250-5160
Telephone number: (212) 250-3406
New York, NY 10005
Attention: Glenn Minkoff
Telecopy number: (212) 250-5160
Telephone number: (212) 250-3406
if to the Noteholder Agent:
DB Structured Products, Inc.
60 Wall Street
New York, NY 10005
Attention: Glenn Minkoff
Telecopy number: (212) 250-5160
Telephone number: (212) 250-3406
60 Wall Street
New York, NY 10005
Attention: Glenn Minkoff
Telecopy number: (212) 250-5160
Telephone number: (212) 250-3406
Note Purchase Agreement
Exhibit 10.8
INDENTURE
between
OPTION ONE OWNER TRUST 2005-9,
as Issuer
as Issuer
and
WELLS FARGO BANK, N.A.,
as Indenture Trustee
as Indenture Trustee
Dated as of December 30, 2005
OPTION ONE OWNER TRUST 2005-9
MORTGAGE-BACKED NOTES
MORTGAGE-BACKED NOTES
TABLE OF CONTENTS
| Page | ||||||||
| Article I DEFINITIONS | 2 | |||||||
| Section 1.01. | Definitions | 2 | ||||||
| Section 1.02. | Rules of Construction | 7 | ||||||
| Article II GENERAL PROVISIONS WITH RESPECT TO THE NOTES | 8 | |||||||
| Section 2.01. | Method of Issuance and Form of Notes | 8 | ||||||
| Section 2.02. | Execution, Authentication, Delivery and Dating | 8 | ||||||
| Section 2.03. | Registration; Registration of Transfer and Exchange | 9 | ||||||
| Section 2.04. | Mutilated, Destroyed, Lost or Stolen Notes | 10 | ||||||
| Section 2.05. | Persons Deemed Noteholders | 11 | ||||||
| Section 2.06. | Payment of Principal and/or Interest; Defaulted Interest | 11 | ||||||
| Section 2.07. | Cancellation | 12 | ||||||
| Section 2.08. | Conditions Precedent to the Authentication of the Notes | 12 | ||||||
| Section 2.09. | Release of Collateral | 13 | ||||||
| Section 2.10. | Additional Note Principal Balance | 14 | ||||||
| Section 2.11. | Tax Treatment | 14 | ||||||
| Section 2.12. | Limitations on Transfer of the Notes | 14 | ||||||
| Article III COVENANTS | 15 | |||||||
| Section 3.01. | Payment of Principal and/or Interest | 15 | ||||||
| Section 3.02. | Maintenance of Office or Agency | 15 | ||||||
| Section 3.03. | Money for Payments to Be Held in Trust | 15 | ||||||
| Section 3.04. | Existence | 17 | ||||||
| Section 3.05. | Protection of Collateral | 17 | ||||||
| Section 3.06. | Negative Covenants | 18 | ||||||
| Section 3.07. | Performance of Obligations: Servicing of Loans | 19 | ||||||
| Section 3.08. | Reserved | 20 | ||||||
| Section 3.09. | Annual Statement as to Compliance | 21 | ||||||
| Section 3.10. | Covenants of the Issuer | 21 | ||||||
| Section 3.11. | Servicer’s Obligations | 21 | ||||||
| Section 3.12. | Restricted Payments | 21 | ||||||
| Section 3.13. | Treatment of Notes as Debt for All Purposes | 22 | ||||||
| Section 3.14. | Notice of Events of Default | 22 | ||||||
| Section 3.15. | Further Instruments and Acts | 22 | ||||||
| Article IV SATISFACTION AND DISCHARGE | 22 | |||||||
| Section 4.01. | Satisfaction and Discharge of Indenture | 22 | ||||||
| Section 4.02. | Application of Trust Money | 23 | ||||||
| Page | ||||||||
| Section 4.03. | Repayment of Moneys Held by Paying Agent | 23 | ||||||
| Article V DEFAULTS AND REMEDIES | 24 | |||||||
| Section 5.01. | Events of Default | 24 | ||||||
| Section 5.02. | Acceleration of Maturity; Rescission and Annulment | 26 | ||||||
| Section 5.03. | Collection of Indebtedness and Suits for Enforcement by Indenture Trustee | 26 | ||||||
| Section 5.04. | Remedies; Priorities | 28 | ||||||
| Section 5.05. | Optional Preservation of the Collateral | 30 | ||||||
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TABLE OF CONTENTS
(continued)
(continued)
| Page | ||||||||
| Section 5.06. | Limitation of Suits | 30 | ||||||
| Section 5.07. | Unconditional Rights of Noteholders to Receive Principal and/or Interest | 31 | ||||||
| Section 5.08. | Restoration of Rights and Remedies | 31 | ||||||
| Section 5.09. | Rights and Remedies Cumulative | 31 | ||||||
| Section 5.10. | Delay or Omission Not a Waiver | 31 | ||||||
| Section 5.11. | Control by Noteholders | 31 | ||||||
| Section 5.12. | Waiver of Past Defaults | 32 | ||||||
| Section 5.13. | Undertaking for Costs | 32 | ||||||
| Section 5.14. | Waiver of Stay or Extension Laws | 33 | ||||||
| Section 5.15. | Action on Notes | 33 | ||||||
| Section 5.16. | Performance and Enforcement of Certain Obligations | 33 | ||||||
| Article VI THE INDENTURE TRUSTEE | 34 | |||||||
| Section 6.01. | Duties of Indenture Trustee | 34 | ||||||
| Section 6.02. | Rights of Indenture Trustee | 35 | ||||||
| Section 6.03. | Individual Rights of Indenture Trustee | 36 | ||||||
| Section 6.04. | Indenture Trustee’s Disclaimer | 36 | ||||||
| Section 6.05. | Notices of Default | 36 | ||||||
| Section 6.06. | Reports by Indenture Trustee to Holders | 36 | ||||||
| Section 6.07. | Compensation and Indemnity | 36 | ||||||
| Section 6.08. | Replacement of Indenture Trustee | 37 | ||||||
| Section 6.09. | Successor Indenture Trustee by Merger | 38 | ||||||
| Section 6.10. | Appointment of Co-Indenture Trustee or Separate Indenture Trustee | 38 | ||||||
| Section 6.11. | Eligibility | 39 | ||||||
| Article VII NOTEHOLDERS’ LISTS AND REPORTS | 39 | |||||||
| Section 7.01. | Issuer to Furnish Indenture Trustee Names and Addresses of Noteholders | 39 | ||||||
| Section 7.02. | Preservation of Information | 40 | ||||||
| Section 7.03. | 144A Information | 40 | ||||||
| Article VIII ACCOUNTS, DISBURSEMENTS AND RELEASES | 40 | |||||||
| Section 8.01. | Collection of Money | 40 | ||||||
| Section 8.02. | Trust Accounts; Distributions | 40 | ||||||
| Section 8.03. | General Provisions Regarding Trust Accounts | 41 | ||||||
| Section 8.04. | The Paying Agent | 42 | ||||||
| Page | ||||||||
| Section 8.05. | Release of Collateral | 42 | ||||||
| Section 8.06. | Opinion of Counsel | 42 | ||||||
| Article IX SUPPLEMENTAL INDENTURES | 43 | |||||||
| Section 9.01. | Supplemental Indentures Without the Consent of the Noteholders | 43 | ||||||
| Section 9.02. | Supplemental Indentures with Consent of Noteholders | 43 | ||||||
| Section 9.03. | Execution of Supplemental Indentures | 45 | ||||||
| Section 9.04. | Effect of Supplemental Indentures | 45 | ||||||
| Section 9.05. | Reference in Notes to Supplemental Indentures | 45 | ||||||
| Article X REDEMPTION OF NOTES; PUT OPTION | 45 | |||||||
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TABLE OF CONTENTS
(continued)
(continued)
| Page | ||||||||
| Section 10.01. | Redemption | 45 | ||||||
| Section 10.02. | Form of Redemption Notice | 46 | ||||||
| Section 10.03. | Notes Payable on Redemption Date | 46 | ||||||
| Section 10.04. | Put Option | 46 | ||||||
| Section 10.05. | Form of Put Option Notice | 46 | ||||||
| Section 10.06. | Notes Payable on Put Date | 46 | ||||||
| Article XI MISCELLANEOUS | 47 | |||||||
| Section 11.01. | Compliance Certificates and Opinions, etc | 47 | ||||||
| Section 11.02. | Form of Documents Delivered to Indenture Trustee | 47 | ||||||
| Section 11.03. | Acts of Noteholders | 48 | ||||||
| Section 11.04. | Notices, etc., to Indenture Trustee and Issuer | 48 | ||||||
| Section 11.05. | Notices to Noteholders, Waiver | 49 | ||||||
| Section 11.06. | Effect of Headings and Table of Contents | 49 | ||||||
| Section 11.07. | Successors and Assigns | 49 | ||||||
| Section 11.08. | Separability | 50 | ||||||
| Section 11.09. | Benefits of Indenture | 50 | ||||||
| Section 11.10. | Legal Holidays | 50 | ||||||
| Section 11.11. | GOVERNING LAW | 50 | ||||||
| Section 11.12. | Counterparts | 50 | ||||||
| Section 11.13. | Recording of Indenture | 50 | ||||||
| Section 11.14. | Trust Obligation | 50 | ||||||
| Section 11.15. | No Petition | 51 | ||||||
| Section 11.16. | Inspection | 51 | ||||||
| Section 11.17. | Third Party Beneficiary | 51 | ||||||
| Section 11.18. | Limitation on Liability | 51 | ||||||
EXHIBITS
Exhibit A-1
|
Form of Notes | |
Exhibit B-1
|
Form of Transferor Affidavit (144A) Transfer Certificate | |
Exhibit B-2
|
Form of Transferee Certificate For Institutional Accredited Investor | |
Exhibit B-3
|
Form of Rule 144A Transferee Certificate Investor |
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TABLE OF CONTENTS
(continued)
(continued)
Page
Exhibit C Form of Securities Legend
INDENTURE
INDENTURE
INDENTURE, dated and effective as of December 30, 2005 (the “Indenture”), between OPTION ONE
OWNER TRUST 2005-9, a Delaware statutory trust, as Issuer (the “Issuer”), and WELLS FARGO BANK,
N.A., as Indenture Trustee (the “Indenture Trustee”).
W I T N E S S E T H T H A T:
In consideration of the mutual covenants herein contained, the Issuer has duly authorized the
execution and delivery of this Indenture to provide for the issuance of Notes, issuable as provided
in this Indenture. All covenants and agreements made by the Issuer herein are for the benefit and
security of the Noteholders.
GRANTING CLAUSE
Subject to the terms of this Indenture, the Issuer hereby Grants on the Closing Date, to the
Indenture Trustee, as Indenture Trustee for the benefit of the Noteholders, all of the Issuer’s
right, title and interest, whether now owned or hereafter acquired, in and to: (i) such Loans as
from time to time are subject to the Sale and Servicing Agreement as listed in the Loan Schedule,
as the same may be amended or supplemented on each Transfer Date and by the removal of Deleted
Loans and Unqualified Loans and by the addition of Qualified Substitute Loans, together with the
Servicer’s Loan Files and the Custodial Loan Files relating thereto and all proceeds thereof, (ii)
the Mortgages and security interests in the Mortgaged Properties, (iii) all payments in respect of
interest and principal with respect to each Loan received on or after the related Transfer Cut-off
Date, (iv) such assets as from time to time are identified as Foreclosure Property, (v) such assets
and funds as are from time to time deposited in or credited to the Distribution Account, the
Collection Account, the Advance Account and the Transfer Obligation Account, including, without
limitation, amounts on deposit in or credited to such accounts that are invested in Permitted
Investments (including, without limitation, all security entitlements (as defined in Section
8-102(17) of the UCC) of the Issuer therein), (vi) lenders’ rights under all Mortgage Insurance
Policies and to any Mortgage Insurance Proceeds, (vii) Net Liquidation Proceeds and Released
Mortgaged Property Proceeds, (viii) all right, title and interest of the Trust (but none of the
obligations) in and to the obligations of Hedging Counterparties under Hedging Instruments (if
any); (ix) all right, title and interest of each of the Depositor, the Loan Originator and the
Trust in and under the Basic Documents including, without limitation, the obligations of the Loan
Originator under the Loan Purchase and Contribution Agreement, the Master Disposition Confirmation
Agreement, and all proceeds of any of the foregoing, (x) all right, title and interest of the
Issuer in and to the Sale and Servicing Agreement, including the Issuer’s right to cause the Loan
Originator to repurchase Loans from the Issuer under certain circumstances described therein, (xi)
all other property of the Trust from time to time, and (xii) all present and future claims,
demands, causes of action and choses in action in respect of any or all of the foregoing and all
payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all
of the foregoing, including all proceeds of the conversion thereof, voluntary or involuntary, into
cash or other liquid property, all cash and noncash proceeds (each as defined in Section 9-102(a)
of the UCC), accounts, accounts receivable, notes, drafts, acceptances, chattel paper, checks,
deposit accounts, insurance proceeds, payment intangibles, securities accounts, condemnation
awards, rights to payment of any and every kind and other forms of obligations and receivables,
instruments and other property which at any time constitute all or part of or are included in the
proceeds of any of the foregoing (collectively, the “Collateral”).
The foregoing Grant is made in trust to secure the payment of principal of and interest on,
and any other amounts owing in respect of, the Notes, and to secure compliance with the provisions
of
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this Indenture, all as provided in this Indenture.
The Indenture Trustee, as Indenture Trustee on behalf of the Noteholders, acknowledges such
Grant, accepts the trusts hereunder and agrees to perform its duties required in this Indenture to
the best of its ability to the end that the interests of the Noteholders may adequately and
effectively be protected.
ARTICLE I
DEFINITIONS
Section 1.01. Definitions.
(a) Except as otherwise specified herein, the following terms have the respective
meanings set forth below for all purposes of this Indenture.
“Act of Noteholders” has the meaning specified in Section 11.03(a) hereof.
“Additional Note Principal Balance” has the meaning set forth in the Sale and
Servicing Agreement.
“Administration Agreement” means the Administration Agreement dated as of December 30,
2005, between the Issuer and the Administrator.
“Administrator” means Option One Mortgage Corporation, or any successor Administrator
under the Administration Agreement.
“Authorized Officer” means, with respect to the Issuer, any officer of the Owner
Trustee who is authorized to act for the Owner Trustee in matters relating to the Issuer and who is
identified on the list of Authorized Officers delivered by the Owner Trustee to the Indenture
Trustee on the Closing Date (as such list may be modified or supplemented from time to time
thereafter) and, so long as the Administration Agreement is in effect, any Vice President or more
senior officer of the Administrator who is authorized to act for the Administrator in matters
relating to the Issuer and to be acted upon by the Administrator pursuant to the Administration
Agreement and who is identified on the list of Authorized Officers delivered by the Administrator
to the Indenture Trustee on the Closing Date (as such list may be modified or supplemented from
time to time thereafter).
“Basic Documents” has the meaning set forth in the Sale and Servicing Agreement.
“Certificate of Trust” means the certificate of trust of the Issuer substantially in
the form of Exhibit C to the Trust Agreement.
“Change of Control” means the acquisition by any Person, or two or more Persons acting
in concert (other than a direct or indirect subsidiary of H&R Block), of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934) of outstanding shares of voting stock of the Loan Originator at any time if
after giving effect to such acquisition (i) such Person or Persons owns twenty percent (20%) or
more of such outstanding voting stock or (ii) H&R Block, Inc. does not own directly or indirectly
more than fifty percent (50%) of such outstanding shares of voting stock.
“Clean-up Call Date” has the meaning set forth in the Sale and Servicing Agreement.
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“Closing Date” means December 30, 2005.
“Collateral” has the meaning specified in the Granting Clause of this Indenture.
“Commission” means the Securities and Exchange Commission.
“Committed Note Principal Balance” has the meaning set forth in the Sale and Servicing
Agreement.
“Corporate Trust Office” means the principal office of the Indenture Trustee at which
at any particular time its corporate trust business shall be administered, which office at the date
of execution of this Indenture is located, for note transfer purposes, at Sixth Street and
Marquette Avenue, Minneapolis, Minnesota 55479, Attention: Option One Owner Trust 2005-9, telecopy
number: (612) 667-6282, telephone number: (800) 344-5128, and for all other purposes, at 9062 Old
Annapolis Road, Columbia, Maryland 21045, Attention: Option One Owner Trust 2005-9, telecopy
number: (410) 715-2380, telephone number: (410) 884-2000, or at such other address as the Indenture
Trustee may designate from time to time by notice to the Noteholders and the Issuer, or the
principal corporate trust office of any successor Indenture Trustee at the address designated by
such successor Indenture Trustee by notice to the Noteholders and the Issuer.
“Default” means any occurrence that is, or with notice or the lapse of time or both
would become, an Event of Default.
“Depositor” has the meaning set forth in the Sale and Servicing Agreement.
“Depository Institution” means any depository institution or trust company, including
the Indenture Trustee, that (a) is incorporated under the laws of the United States of America or
any State thereof, (b) is subject to supervision and examination by federal or state banking
authorities and (c) has outstanding unsecured commercial paper or other short-term unsecured debt
obligations that are rated at a rating to which the Majority Noteholders consent in writing.
“Event of Default” has the meaning specified in Section 5.01 hereof.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Executive Officer” means, with respect to (i) the Depositor, the Servicer, the Loan
Originator or any Affiliate of any of them, the President, any Vice President or the Treasurer of
such corporation; and with respect to any partnership, any general partner thereof, (ii) the Note
Registrar, any Responsible Officer of the Indenture Trustee, (iii) any other corporation, the Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, President, Executive Vice
President, any Vice President, the Secretary or the Treasurer of such entity and (iv) any
partnership, any general partner thereof.
“Grant” means mortgage, pledge, bargain, sell, warrant, alienate, remise, release,
convey, assign, transfer, create and grant a lien upon and a security interest in and right of
set-off against, deposit, set over and confirm pursuant to this Indenture. A Grant of the
Collateral or of any other agreement or instrument shall include all rights, powers and options
(but none of the obligations) of the granting party thereunder, including the immediate and
continuing right to claim for, collect, receive and give receipt for
principal and interest payments in respect of the Collateral and all other moneys payable
thereunder, to give and receive notices and other communications, to make waivers or other
agreements, to exercise all rights and options, to bring Proceedings in the name of the granting
party or otherwise, and generally to
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do and receive anything that the granting party is or may be entitled to do or receive thereunder
or with respect thereto.
“Holder” means the Person in whose name a Note is registered on the Note Register.
“ICA Owner” means “beneficial owner” as such term is used in Section 3(c)(1) of the
Investment Company Act of 1940, as amended (other than any persons who are excluded from such term
or from the 100-beneficial owner test of Section 3(c)(1) by law or regulations adopted by the
Securities and Exchange Commission.
“Indenture” means this Indenture and any amendments hereto.
“Indenture Trustee” means Wells Fargo Bank, N.A., a national banking association, as
Indenture Trustee under this Indenture, or any successor Indenture Trustee hereunder.
“Issuer” means Option One Owner Trust 2005-9.
“Issuer Order” and “Issuer Request” mean a written order or request signed in
the name of the Issuer by any one of its Authorized Officers and delivered to the Indenture
Trustee.
“Loan Originator” means Option One Mortgage Corporation, a California corporation.
“Majority Certificateholders” has the meaning set forth in the Sale and Servicing
Agreement.
“Maturity Date” means, with respect to the Notes, 364 days after the commencement of
the Revolving Period.
“Maximum Note Principal Balance” has the meaning set forth in the Pricing Letter.
“Note” means any Note authorized by and authenticated and delivered under this
Indenture.
“Note Interest Rate” has the meaning set forth in the Pricing Letter.
“Note Principal Balance” has the meaning set forth in the Sale and Servicing
Agreement.
“Note Purchase Agreement” means the Note Purchase Agreement, dated as of December 30,
2005, among the Issuer, the Depositor, DB Structured Products, Inc., Gemini Securitization Corp.,
LLC, Aspen Funding Corp. and Newport Funding Corp., as the same may be amended from time to time.
“Note Redemption Amount” has the meaning set forth in the Sale and Servicing
Agreement.
“Note Register” and “Note Registrar” have the respective meanings specified in
Section 2.03 hereof.
“Noteholder” means the Person in whose name a Note is registered on the Note Register.
“Noteholder Agent” has the meaning set forth in the Sale and Servicing Agreement.
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“Officer’s Certificate” when used in this Indenture, means a certificate signed by any
Authorized Officer of the Issuer or the Administrator, under the circumstances described in, and
otherwise complying with, the applicable requirements of Section 11.01 hereof, and
delivered to the Indenture Trustee. Unless otherwise specified, any reference in this Indenture to
an Officer’s Certificate shall be to an Officer’s Certificate of any Authorized Officer of the
Issuer or the Administrator.
“Opinion of Counsel,” when used in this Indenture, means one or more written opinions
of counsel who may, except as otherwise expressly provided in this Indenture, be an employee of or
counsel to the Issuer, and which opinion or opinions shall be addressed to the Indenture Trustee,
as Indenture Trustee, and shall comply with any applicable requirements of Section 11.01
hereof and shall be in form and substance satisfactory to the Noteholder Agent.
“Outstanding” means, with respect to any Note and as of the date of determination, any
Note theretofore authenticated and delivered under this Indenture except:
(i) Notes theretofore canceled by the Note Registrar or delivered to the
Note Registrar for cancellation;
(ii) Notes or portions thereof the payment for which money in the necessary
amount has theretofore been deposited with the Indenture Trustee or any Paying Agent in
trust for the Noteholders (provided, however, that if such Notes are to be redeemed, notice
of such redemption has been duly given pursuant to this Indenture or provision for such
notice satisfactory to the Indenture Trustee has been made); and
(iii) Notes in exchange for or in lieu of which other Notes have been
authenticated and delivered pursuant to this Indenture unless proof satisfactory to the
Indenture Trustee is presented that any such Notes are held by a bona fide purchaser;
provided, however, that in determining whether the Noteholders representing the requisite
Percentage Interests of the Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder or under any Basic Document,
Notes owned by the Issuer, any other obligor upon the Notes, the Depositor or any Affiliate
of any of the foregoing Persons shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Indenture Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or waiver, only
Notes that the Indenture Trustee actually knows to be owned in such manner shall be
disregarded. Notes owned in such manner that have been pledged in good faith may be
regarded as Outstanding if the pledgee certifies to the Indenture, Trustee (y) that the
pledgee has the right so to act with respect to such Notes and (z) that the pledgee is not
the Issuer, any other obligor upon the Notes, the Depositor or any Affiliate of any of the
foregoing Persons.
“Owner Trustee” means Wilmington Trust Company, not in its individual capacity but
solely as Owner Trustee under the Trust Agreement, or any successor Owner Trustee under the Trust
Agreement.
“Paying Agent” (unless the Paying Agent is the Servicer) means a Person that meets the
eligibility standards for the Indenture Trustee specified in Section 6.11 hereof and is
authorized by the
Issuer to make payments to and distributions from the Collection Account and the Distribution
Account, including payment of principal of or interest on the Notes on behalf of the Issuer. The
initial Paying Agent shall be the Servicer; provided that if the Servicer is terminated as Paying
Agent for any reason, the Indenture Trustee shall be the Paying Agent until another Paying Agent is
appointed by the Noteholder Agent pursuant to Section 8.04 herein. The Indenture Trustee
shall be entitled to reasonable additional compensation for assuming the role of Paying Agent.
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“Payment Date” has the meaning set forth in the Sale and Servicing Agreement.
“Percentage Interest” means, with respect to any Note and as of any date of
determination, the percentage equal to a fraction, the numerator of which is the principal balance
of such Note as of such date of determination and the denominator of which is the Note Principal
Balance.
“Person” has the meaning set forth in the Sale and Servicing Agreement.
“Predecessor Note” means, with respect to any particular Note, every previous Note
evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for
the purpose of this definition, any Note authenticated and delivered under Section 2.04
hereof in lieu of a mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same
debt as the mutilated, lost, destroyed or stolen Note.
“Pricing Letter” means the Pricing Letter among the Issuer, the Depositor, Option One
and the Indenture Trustee, dated December 30, 2005 and any amendments thereto.
“Proceeding” means any suit in equity, action at law or other judicial or
administrative proceeding.
“Record Date” has the meaning set forth in the Sale and Servicing Agreement.
“Redemption Date” means in the case of a redemption of the Notes pursuant to
Section 10.01 hereof, the Payment Date specified by the Servicer pursuant to such
Section 10.01.
“Registered Holder” means the Person in the name of which a Note is registered on the
Note Register on the applicable Record Date.
“Revolving Period” has the meaning set forth in the Sale and Servicing Agreement.
“Sale Agent” has the meaning assigned to such term in Section 5.11 hereof.
“Sale and Servicing Agreement” means the Sale and Servicing Agreement, dated as of
December 30, 2005, among the Issuer, the Depositor, the Servicer, the Loan Originator and the
Indenture Trustee on behalf of the Noteholders, as the same may be further amended or supplemented
from time to time.
“Servicer” shall mean Option One Mortgage Corporation, in its capacity as servicer
under the Sale and Servicing Agreement, and any successor servicer thereunder.
“State” means any one of the States of the United States of America or the District of
Columbia.
“Termination Price” has the meaning set forth in the Sale and Servicing Agreement.
“Transfer Date” has the meaning set forth in the Sale and Servicing Agreement.
“Trust Agreement” means the Trust Agreement dated as of December 30, 2005, between the
Depositor and the Owner Trustee.
“Trust Certificate” has the meaning assigned to such term in Section 1.1 of
the Trust Agreement.
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“Trust Indenture Act” means the Trust Indenture Act of 1939 as in force on the date
hereof, unless otherwise specifically provided.
(b) Except as otherwise specified herein or as the context may otherwise require,
capitalized terms used but not otherwise defined herein have the respective meanings set forth in
the Sale and Servicing Agreement for all purposes of this Indenture.
Section 1.02. Rules of Construction. Unless the context otherwise requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(iii) “or” is not exclusive;
(iv) “including” means including without limitation;
(v) words in the singular include the plural and words in the plural include
the singular; and
(vi) any agreement, instrument or statute defined or referred to herein or in
any instrument or certificate delivered in connection herewith means such agreement,
instrument or statute as from time to time amended, modified or supplemented (as provided
in such agreements) and includes (in the case of agreements or instruments) references to
all attachments thereto and instruments incorporated therein; references to a Person are
also to its permitted successors and assigns.
ARTICLE II
GENERAL PROVISIONS WITH RESPECT TO THE NOTES
Section 2.01. Method of Issuance and Form of Notes.
(a) The Notes shall be designated generally as the “Option One Owner Trust 2005-9
Mortgage-Backed Notes” of the Issuer. Each Note shall bear upon its face the designation so
selected for the Notes. All Notes shall be identical in all respects except for the denominations
thereof. All Notes issued under this Indenture shall be in all respects equally and ratably
entitled to the benefits thereof without preference, priority or distinction on account of the
actual time or times of authentication and delivery, all in accordance with the terms and
provisions of this Indenture.
The Notes may be typewritten, printed, lithographed or engraved or produced by any combination
of these methods, all as determined by the officers executing such Notes, as evidenced by their
execution of such Notes.
Each Note shall be dated the date of its authentication. The terms of the Notes shall be set
forth in this Indenture.
The Notes shall be in definitive form and shall bear a legend substantially in the form of
Exhibit C attached hereto.
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Section 2.02. Execution, Authentication, Delivery and Dating. The Notes shall be
executed on behalf of the Issuer by an Authorized Officer of the Owner Trustee or the
Administrator. The signature of any such Authorized Officer on the Notes may be manual or
facsimile.
Notes bearing the manual or facsimile signature of individuals who were at any time Authorized
Officers of the Owner Trustee or the Administrator shall bind the Issuer, notwithstanding that such
individuals or any of them have ceased to hold such offices prior to the authentication and
delivery of such Notes or did not hold such offices at the date of such Notes.
Subject to the satisfaction of the conditions set forth in Section 2.08 hereof, the
Indenture Trustee shall, upon Issuer Order, authenticate and deliver the Notes.
The Notes that are authenticated and delivered by the Indenture Trustee to or upon the order
of the Issuer on the Closing Date shall be dated as of such Closing Date. All other Notes that are
authenticated after the Closing Date for any other purpose under the Indenture shall be dated the
date of their authentication. The Notes shall be issued in such denominations as may be agreed by
the Issuer and the Noteholder Agent.
No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for
any purpose, unless there appears on such Note a certificate of authentication substantially in the
form provided for herein executed by the Indenture Trustee by the manual signature of one of its
authorized signatories, and such certificate upon any Note shall be conclusive evidence, and the
only evidence, that such Note has been duly authenticated and delivered hereunder.
Section 2.03. Registration; Registration of Transfer and Exchange. The Issuer
shall cause to be kept a register (the “Note Register”) in which, subject to such
reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Notes
and the registration of transfers of Notes. The Indenture Trustee initially shall be the “Note
Registrar” for the purpose of registering Notes and transfers of Notes as herein provided. Upon
any resignation of any Note Registrar, the Issuer shall promptly
appoint a successor or, if it elects not to make such an appointment, assume the duties of the
Note Registrar.
If a Person other than the Indenture Trustee is appointed by the Issuer as Note Registrar, the
Issuer will give the Indenture Trustee prompt written notice of the appointment of such Note
Registrar and of the location, and any change in the location, of the Note Register, and the
Indenture Trustee shall have the right to inspect the Note Register at all reasonable times and to
obtain copies thereof, and the Indenture Trustee shall have the right to rely upon a certificate
executed on behalf of the Note Registrar by an Executive Officer thereof as to the names and
addresses of the Noteholders and the principal amounts and number of the Notes.
Upon surrender for registration of transfer of any Note at the office or agency of the Issuer
to be maintained as provided in Section 3.02 hereof, the Issuer shall execute, and the
Indenture Trustee shall authenticate and the Noteholder shall obtain from the Indenture Trustee, in
the name of the designated transferee or transferees, one or more new Notes in any authorized
denominations, of a like aggregate Note Principal Balance.
At the option of the Holder, Notes may be exchanged for other Notes in any authorized
denominations, of a like aggregate principal amount, upon surrender of the Notes to be exchanged at
such office or agency. Whenever any Notes are so surrendered for exchange, the Issuer shall
execute, and the Indenture Trustee shall authenticate and the Noteholder shall obtain from the
Indenture Trustee, the Notes which the Noteholder making the exchange is entitled to receive.
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All Notes issued upon any registration of transfer or exchange of Notes shall be the valid
obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Notes surrendered upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or exchange shall be duly
endorsed by, or be accompanied by a written instrument of transfer in the form attached to the form
of Note attached as Exhibit A hereto duly executed by the Holder thereof or such Holder’s attorney
duly authorized in writing, with such signature guaranteed by an “eligible guarantor institution”
meeting the requirements of the Securities Transfer Agents’ Medallion Program (“STAMP”).
No service charge shall be made to a Noteholder for any registration of transfer or exchange
of Notes, but the Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of transfer or exchange
of Notes, other than exchanges pursuant to Section 9.05 hereof not involving any transfer.
The preceding provisions of this Section 2.03 notwithstanding, the Issuer shall not be
required to make, and the Note Registrar need not register, transfers or exchanges of Notes
selected for redemption or of any Note for a period of 15 days preceding the due date for any
payment with respect to such Note.
Section 2.04. Mutilated, Destroyed, Lost or Stolen Notes. If (i) any mutilated
Note is surrendered to the Indenture Trustee, or the Indenture Trustee receives evidence to its
satisfaction of the destruction, loss or theft of any Note, and (ii) there is delivered to the
Issuer and Indenture Trustee such security or indemnity as may reasonably be required by it to hold
the Issuer and the Indenture Trustee, as applicable, harmless, then, in the absence of notice to
the Issuer, the Note Registrar or the Indenture Trustee that such Note has been acquired by a bona
fide purchaser, an Authorized Officer of the Owner Trustee or
the Administrator on behalf of the Issuer shall execute, and upon its written request the
Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Note, a replacement Note; provided, however, that if any such destroyed,
lost or stolen Note, but not a mutilated Note, shall have become or within seven days shall be due
and payable, or shall have been called for redemption, instead of issuing a replacement Note, the
Issuer may pay such destroyed, lost or stolen Note when so due or payable or upon the Redemption
Date without surrender thereof. If, after the delivery of such replacement Note or payment of a
destroyed, lost or stolen Note pursuant to the proviso to the preceding sentence, a bona fide
purchaser of the original Note in lieu of which such replacement Note was issued presents for
payment such original Note, the Issuer shall be entitled to recover such replacement Note (or such
payment) from the Person to which it was delivered or any Person taking such replacement Note from
such Person to which such replacement Note was delivered or any assignee of such Person, except a
bona fide purchaser, and the Issuer and the Indenture Trustee shall be entitled to recover upon the
security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred
by the Issuer or the Indenture Trustee in connection therewith.
Upon the issuance of any replacement Note under this Section 2.04, the Issuer may
require the payment by the Holder of such Note of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other reasonable expenses
(including the fees and expenses of the Indenture Trustee) connected therewith.
Every replacement Note issued pursuant to this Section 2.04 in replacement of any
mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual
obligation of the Issuer, whether or not the mutilated, destroyed, lost or stolen Note shall be at
any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally
and proportionately with any and all other Notes duly issued hereunder.
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The provisions of this Section 2.04 are exclusive and shall preclude (to the extent
lawful) all other rights and remedies with respect to the replacement or payment of mutilated,
destroyed, lost or stolen Notes.
Section 2.05. Persons Deemed Noteholders. Prior to due presentment for
registration of transfer of any Note, the Issuer, the Indenture Trustee and any agent of the Issuer
or the Indenture Trustee may treat the Person in the name of which any Note is registered (as of
the day of determination) as the Noteholder for the purpose of receiving payments of principal of
and interest, if any, on such Note and for all other purposes whatsoever, whether or not such Note
be overdue, and none of the Issuer, the Indenture Trustee or any agent of the Issuer or the
Indenture Trustee shall be affected by notice to the contrary.
Section 2.06. Payment of Principal and/or Interest; Defaulted Interest.
(a) The Notes shall accrue interest at the Note Interest Rate, and such interest
shall be payable on each Payment Date, subject to Section 3.01 hereof. Any installment of
interest or principal, if any, payable on any Note that is punctually paid or duly provided for by
the Issuer on the applicable Payment Date shall be paid to the Person in the name of which such
Note (or one or more Predecessor Notes) is registered on the next preceding Record Date based on
the Percentage Interest represented by its respective Note, without preference or priority of any
kind, and, except as otherwise provided in the next succeeding sentence, shall be made by wire
transfer of immediately available funds to the account of such Noteholder, if such Noteholder shall
own of record Notes having a Percentage Interest of at least 20% and shall have so notified the
Paying Agent and the Indenture Trustee, and otherwise by check mailed to the
address of such Noteholder appearing in the Note Register no less than five days preceding the
related Record Date. The final installment of principal payable with respect to such Note shall be
payable as provided in Section 2.06(b) below. The funds represented by any such checks
returned undelivered shall be held in accordance with Section 3.03 hereof.
(b) The principal of each Note shall be payable in installments on each Payment Date
as provided in Sections 5.01 and 5.02 of the Sale and Servicing Agreement and Section 5.04(b)
hereof. Notwithstanding the foregoing, the entire unpaid principal amount of the Notes shall be due
and payable, if not previously paid, on the earlier of (i) the Maturity Date, (ii) the Redemption
Date, (iii) the Final Put Date and (iv) the date on which an Event of Default shall have occurred
and be continuing, if the Indenture Trustee or the Majority Noteholders shall have declared the
Notes to be immediately due and payable in the manner provided in Section 5.02 hereof.
All principal payments on the Notes shall be made pro rata to the Noteholders based on their
respective Percentage Interests. The Paying Agent shall notify the Person in the name of which a
Note is registered at the close of business on the Record Date preceding the Payment Date on which
the Issuer expects that the final installment of principal of and interest on such Note will be
paid. Such notice shall be mailed or transmitted by facsimile prior to such final Payment Date and
shall specify that such final installment will be payable only upon presentation and surrender of
such Note and shall specify the place where such Note may be presented and surrendered for payment
of such installment. Notices in connection with redemption of Notes shall be provided to
Noteholders as set forth in Section 10.02 hereof.
Section 2.07. Cancellation. All Notes surrendered for payment, registration of
transfer, exchange or redemption shall, if surrendered to any Person other than the Indenture
Trustee, be delivered to the Indenture Trustee and shall promptly be canceled by the Indenture
Trustee. The Issuer may at any time deliver to the Indenture Trustee for cancellation any Notes
previously authenticated and delivered hereunder which the Issuer may have acquired in any manner
whatsoever, and all Notes so
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delivered shall promptly be canceled by the Indenture Trustee. No Notes shall be authenticated in
lieu of or in exchange for any Notes canceled as provided in this Section 2.07, except as
expressly permitted by this Indenture. All canceled Notes may be held or disposed of by the
Indenture Trustee in accordance with its standard retention or disposal policy as in effect at the
time unless the Issuer shall direct by an Issuer Order that they be destroyed or returned to it;
provided, however, that such Issuer Order is timely and the Notes have not been previously disposed
of by the Indenture Trustee.
Section 2.08. Conditions Precedent to the Authentication of the Notes. The Notes
may be authenticated by the Indenture Trustee upon receipt by the Indenture Trustee of the
following:
(a) An Issuer Order authorizing authentication of such Notes by the Indenture
Trustee;
(b) All of the items of Collateral which are to be delivered pursuant to the Basic
Documents to the Indenture Trustee or its designee by the related Closing Date shall have been
delivered;
(c) An executed counterpart of each Basic Document;
(d) One or more Opinions of Counsel addressed to the Indenture Trustee to the effect
that:
| (i) | the Owner Trustee has power and authority to execute, deliver and perform its obligations under the Trust Agreement; | ||
| (ii) | the Issuer has been duly formed, is validly existing as a statutory trust under the laws of the State of Delaware, 12 Del. C. Section 3801 et seq., and has power, authority and legal right to execute and deliver this Indenture, the Note Purchase Agreement, the Custodial Agreement, the Administration Agreement and the Sale and Servicing Agreement; | ||
| (iii) | assuming due authorization, execution and delivery hereof by the Indenture Trustee, the Indenture is a valid, legal and binding obligation of the Issuer, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent or preferential conveyance and other similar laws of general application affecting the rights of creditors generally and to general principles of equity (regardless of whether such enforcement is considered in a Proceeding in equity or at law); | ||
| (iv) | the Notes, when executed and authenticated as provided herein and delivered against payment therefor, will be the valid, legal and binding obligations of the Issuer pursuant to the terms of this Indenture, entitled to the benefits of this Indenture, and will be enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent or preferential conveyance and other similar laws of general application affecting the rights of creditors generally and to general principles of equity (regardless of whether such enforcement is considered in a Proceeding in equity or at law); | ||
| (v) | this Indenture is not required to be qualified under the Trust Indenture Act; |
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| (vi) | no authorization, approval or consent of any governmental body having jurisdiction in the premises which has not been obtained by the Issuer is required to be obtained by the Issuer for the valid issuance and delivery of the Notes, except that no opinion need be expressed with respect to any such authorizations, approvals or consents as may be required under any state securities or “blue sky” laws; and | ||
| (vii) | any other matters that the Indenture Trustee may reasonably request. |
(e) An Officer’s Certificate complying with the requirements of Section
11.01 hereof and stating that:
| (i) | the Issuer is not in Default under this Indenture and the issuance of the Notes applied for will not result in any breach of any of the terms, conditions or provisions of, or constitute a default under, the Trust Agreement, any indenture, mortgage, deed of trust or other agreement or instrument to which the Issuer is a party or by which it is bound, or any order of any court or administrative agency entered in any Proceeding to which the Issuer is a party or by which it may be bound or to which it may be subject, and that all conditions precedent provided in this Indenture relating to the authentication and delivery of the Notes applied for have been complied with; | ||
| (ii) | the Issuer is the owner of all of the Loans, has not assigned any interest or participation in the Loans (or, if any such interest or participation has been assigned, it has been released) and has the right to Grant all of the Loans to the Indenture Trustee; | ||
| (iii) | the Issuer has Granted to the Indenture Trustee all of its right, title and interest in and to the Collateral, and has delivered or caused the same to be delivered to the Indenture Trustee; and | ||
| (iv) | all conditions precedent provided for in this Indenture relating to the authentication of the Notes have been complied with. |
Section 2.09. Release of Collateral.
(a) Except as otherwise provided by the terms of the Basic Documents, the Indenture
Trustee shall release the Collateral from the lien of this Indenture only upon receipt of an Issuer
Request accompanied by the written consent of the Noteholder Agent in accordance with the
procedures set forth in the Custodial Agreement.
(b) The Indenture Trustee shall, if requested by the Servicer, temporarily release
or cause the Custodian temporarily to release to the Servicer the Custodial Loan File pursuant to
the provisions of Section 5(b) of the Custodial Agreement upon compliance by the Servicer
with the provisions thereof; provided, however, that the Custodian’s records shall indicate the
Issuer’s pledge to the Indenture Trustee under the Indenture.
Section 2.10. Additional Note Principal Balance. In the event of payment of
Additional Note Principal Balance by the Noteholders as provided in Section 2.01(c) of the
Sale and Servicing Agreement, each Noteholder shall, and is hereby authorized to, record on the
schedule attached
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to its Note the date and amount of any Additional Note Principal Balance advanced by it, and each
repayment thereof; provided that failure to make any such recordation on such schedule or any error
in such schedule shall not adversely affect any Noteholder’s rights with respect to its Additional
Note Principal Balance and its right to receive interest payments in respect of the Additional Note
Principal Balance held by such Noteholder.
Absent manifest error, the Note Principal Balance of each Note as set forth in the notations
made by the related Noteholder on such Note shall be binding upon the Indenture Trustee and the
Issuer; provided that failure by a Noteholder to make such recordation on its Note or any error in
such notation shall not adversely affect any Noteholder’s rights with respect to its Note Principal
Balance and its right to receive principal and interest payments in respect thereof.
Section 2.11. Tax Treatment. The Issuer has entered into this Indenture, and the
Notes will be issued, with the intention that for all purposes, including federal, state and local
income, single business and franchise tax purposes, the Notes will qualify as indebtedness of the
Issuer secured by the Collateral. The Issuer, by entering into this Indenture, and each Noteholder,
by its acceptance of a Note, agrees to treat the Notes for all purposes, including federal, state
and local income, single business and franchise tax purposes, as indebtedness of the Issuer. The
Indenture Trustee will have no responsibility for filing or preparing any tax returns.
Section 2.12. Limitations on Transfer of the Notes.
(a) The Notes have not been and will not be registered under the Securities Act and
will not be listed on any exchange. No transfer of a Note shall be made unless such transfer is
made pursuant to an effective registration statement under the Securities Act and all applicable
state securities laws or is exempt from the registration requirements under the Securities Act and
such state securities laws. In order to assure compliance with the Securities Act and state
securities laws, any transfer of a Note shall be made (A) in reliance on Rule 144A under the
Securities Act, in which case, the Indenture Trustee shall require that the transferor deliver a
certification substantially in the form of Exhibit B-1 hereto and that the transferee
deliver a certification substantially in the form of Exhibit B-3 hereto, or (B) to an
institutional “accredited investor” within the meaning of Rule 501(a)(1), (2), (3) or (7) of
Regulation D under the Securities Act that is not a “qualified institutional buyer,” in which case
the Indenture Trustee shall require that the transferee deliver a certification substantially in
the form of Exhibit B-2 hereto. The Indenture Trustee shall not make any transfer or
re-registration of the Notes if after such transfer or re-registration, there would be more than
five Noteholders. Each Noteholder shall, by its acceptance of a Note, be deemed to have represented
and warranted that the number of ICA Owners with respect to all of its Notes shall not exceed four.
(b) The Note Registrar shall not register the transfer of any Note unless the
Indenture Trustee has received a certificate from the transferee to the effect that either (i) the
transferee is not an employee benefit plan or other retirement plan or arrangement subject to Title
I of the Employee Retirement Income Security Act of 1974, as amended, or Section 4975 of the
Internal Revenue Code of 1986, as amended (each, a “Plan”), and is not acting on behalf of
or investing the assets of a Plan or (ii) if the transferee is a Plan or is acting on behalf of or
investing the assets of a Plan, either that no prohibited transaction within the meaning of Section
406(a) of ERISA or Section 4975 of the Code would occur upon the transfer of the Note or that the
conditions for exemptive relief under a prohibited transaction exemption has been satisfied,
including, but not limited to: Prohibited Transaction Class Exemption (“PTCE”) 96-23
(relating to transactions effected by an “in-house asset manager”), PTCE 95-60 (relating to
transactions involving insurance company general accounts), PTCE 91-38 (relating to transactions
involving bank collective investment funds), PTCE 90-1 (relating to transactions involving
insurance
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company pooled separate accounts) and PTCE 84-14 (relating to transactions effected by a “qualified
professional asset manager”).
ARTICLE III
COVENANTS
Section 3.01. Payment of Principal and/or Interest. The Issuer will duly and
punctually pay (or will cause to be paid duly and punctually) the principal of and interest on the
Notes in accordance with the terms of the Notes, this Indenture and the Sale and Servicing Agreement.
Amounts properly withheld under the Code by any Person from a payment to any Noteholder of interest
and/or principal shall be considered as having been paid by the Issuer to such Noteholder for all
purposes of this Indenture. The Notes shall be non-recourse obligations of the Issuer and shall be
limited in right of payment to amounts available from the Collateral, as provided in this
Indenture. The Issuer shall not otherwise be liable for payments on the Notes. If any other
provision of this Indenture shall be deemed to conflict with the provisions of this Section
3.01, the provisions of this Section 3.01 shall control.
Section 3.02. Maintenance of Office or Agency. The Indenture Trustee shall
maintain at the Corporate Trust Office an office or agency where Notes may be surrendered for
registration of transfer or exchange and where notices and demands to or upon the Issuer in respect
of the Notes and this Indenture may be served. The Indenture Trustee shall give prompt written
notice to the Issuer of the location, and of any change in the location, of any such office or
agency.
Section 3.03. Money for Payments to Be Held in Trust. As provided in
Section 8.02(a) and (b) hereof, all payments of amounts due and payable with respect to any
Notes that are to be made from amounts withdrawn from the Distribution Account pursuant to
Section 8.02(c) hereof shall be made on behalf of the Issuer by the Indenture Trustee or by
the Paying Agent, and no amounts so withdrawn from the Distribution Account for payments of Notes
shall be paid over to the Issuer except as provided in this Section 3.03.
Any Paying Agent shall be appointed by the Noteholder Agent with written notice thereof to the
Indenture Trustee. The Issuer shall not appoint any Paying Agent (other than the Indenture Trustee
or Servicer) which is not, at the time of such appointment, a Depository Institution.
The Issuer will cause each Paying Agent other than the Indenture Trustee to execute and
deliver to the Indenture Trustee an instrument in which such Paying Agent shall agree with the
Indenture Trustee (and if the Indenture Trustee acts as Paying Agent, it hereby so agrees), subject
to the provisions of this Section 3.03, that such Paying Agent will:
(i) hold all sums held by it for the payment of amounts due with respect to
the Notes in trust for the benefit of the Persons entitled thereto until such sums shall be
paid to such Persons or otherwise disposed of as herein provided and pay such sums to such
Persons as herein provided;
(ii) give the Indenture Trustee notice of any Default by the Issuer (or any
other obligor upon the Notes) of which it has actual knowledge in the making of any payment
required to be made with respect to the Notes;
(iii) at any time during the continuance of any such Default, upon the written
request of the Majority Noteholders or the Indenture Trustee, forthwith pay to the
Indenture Trustee all sums so held in trust by such Paying Agent;
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(iv) immediately resign as a Paying Agent and forthwith pay to the Indenture
Trustee all sums held by it in trust for the payment of Notes if at any time it ceases to
meet the standards required to be met by a Paying Agent at the time of its appointment; and
(v) comply with all requirements of the Code with respect to the withholding
from any payments made by it on any Notes of any applicable withholding taxes imposed
thereon and with respect to any applicable reporting requirements in connection therewith;
provided, however, that with respect to withholding and reporting requirements applicable
to original issue discount (if any) on the Notes, the Issuer shall have first provided the
calculations pertaining thereto to the Indenture Trustee.
The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of
this Indenture or for any other purpose, by Issuer Order direct any Paying Agent to pay to the
Indenture Trustee all sums held in trust by such Paying Agent, such sums to be held by the
Indenture Trustee upon the same trusts as those upon which the sums were held by such Paying Agent;
and upon such payment by any Paying Agent to the Indenture Trustee, such Paying Agent shall be
released from all further liability with respect to such money.
Subject to applicable laws with respect to escheat of funds or abandoned property, any money
held by the Indenture Trustee or any Paying Agent in trust for the payment of any amount due with
respect to any Note and remaining unclaimed for two years after such amount has become due and
payable shall be discharged from such trust and be paid to the Issuer on Issuer Request; and the
Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Issuer for
payment thereof (but only to the extent of the amounts so paid to the Issuer), and all liability of
the Indenture Trustee or such Paying Agent with respect to such trust money shall thereupon cease;
provided, however, that the Indenture Trustee or such Paying Agent, before being required to make
any such repayment, shall at the expense and direction of the Issuer cause to be published, once in
a newspaper of general circulation in the City of New York customarily published in the English
language on each Business Day, notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such publication, any
unclaimed balance of such money then remaining will be repaid to the Issuer. The Indenture Trustee
shall also adopt and employ any other reasonable means of notification of such repayment
(including, but not limited to, mailing notice of such repayment to Noteholders whose Notes have
been called but have not been surrendered for redemption or whose right to or interest in moneys
due and payable but not claimed at the last address of record for each such Noteholder determinable
from the records of the Indenture Trustee or of any Paying Agent). Any costs and expenses of the
Indenture Trustee and the Paying Agent incurred in the holding of such funds shall be charged
against such funds. Monies so held shall not bear interest.
Section 3.04. Existence.
(a) Subject to subparagraph (b) of this Section 3.04, the Issuer will keep
in full effect its existence, rights and franchises as a statutory trust under the laws of the
State of Delaware (unless it becomes, or any successor Issuer hereunder is or becomes, organized
under the laws of any other State or of the United States of America, in which case the Issuer will
keep in full effect its existence, rights and franchises under the laws of such other jurisdiction)
and will obtain and preserve its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and enforceability of this
Indenture, the Notes and the Collateral. The Issuer shall comply in all respects with the covenants
contained in the Trust Agreement, including without limitation, the “special purpose entity” set
forth in Section 4.1 thereof.
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(b) Any successor to the Owner Trustee appointed pursuant to Section 10.2 of
the Trust Agreement shall be the successor Owner Trustee under this Indenture without the execution
or filing of any paper, instrument or further act to be done on the part of the parties hereto.
(c) Upon any consolidation or merger of or other succession to the Owner Trustee,
the Person succeeding to the Owner Trustee under the Trust Agreement may exercise every right and
power of the Owner Trustee under this Indenture with the same effect as if such Person had been
named as the Owner Trustee herein.
Section 3.05. Protection of Collateral. The Issuer will from time to time execute
and deliver all such reasonable supplements and amendments hereto and all such financing
statements, continuation statements, instruments of further assurance and other instruments, and
will take such other action necessary or advisable to:
(i) provide further assurance with respect to the Grant of all or any
portion of the Collateral;
(ii) maintain or preserve the lien and security interest (and the priority
thereof) of this Indenture or carry out more effectively the purposes hereof;
(iii) perfect, publish notice of or protect the validity of any Grant made or
to be made by this Indenture;
(iv) enforce any rights with respect to the Collateral; and
(v) preserve and defend title to the Collateral and the rights of the
Indenture Trustee and the Noteholders in such Collateral against the claims of all Persons
and parties.
The Issuer hereby designates the Administrator, its agent and attorney-in-fact to execute any
financing statement, continuation statement or other instrument required to be executed pursuant to
this Section 3.05.
Section 3.06. Negative Covenants. Without the written consent of the Majority
Noteholders, so long as any Notes are Outstanding, the Issuer shall not:
(i) except as expressly permitted by the Basic Documents, sell, transfer,
exchange or otherwise dispose of any of the properties or assets of the Issuer, including
those included in any part of the Trust Estate, unless directed to do so by the Noteholders
as permitted herein;
(ii) claim any credit on, or make any deduction from the principal or
interest payable in respect of, the Notes (other than amounts properly withheld from such
payments under the Code) or assert any claim against any present or former Noteholder by
reason of the payment of the taxes levied or assessed upon any part of the Trust Estate;
(iii) engage in any business or activity other than as expressly permitted by
this Indenture and the other Basic Documents, other than in connection with, or relating
to, the issuance of Notes pursuant to this Indenture, or amend this Indenture as in effect
on the Closing Date other than in accordance with Article IX hereof;
(iv) issue any debt obligations except under this Indenture;
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(v) incur or assume any indebtedness or guaranty any indebtedness of any
Person, except for such indebtedness as may be incurred by the Issuer in connection with
the issuance of the Notes pursuant to this Indenture;
(vi) dissolve or liquidate in whole or in part or merge or consolidate with
any other Person;
(vii) (A) permit the validity or effectiveness of this Indenture to be
impaired, or permit the lien of this Indenture to be amended, hypothecated, subordinated,
terminated or discharged, or permit any Person to be released from any covenants or
obligations with respect to the Notes except as may expressly be permitted hereby, (B)
except as provided in the Basic Documents, permit any lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or otherwise arise
upon or burden the Trust Estate or any part thereof or any interest therein or the proceeds
thereof (other than tax liens, mechanics’ liens and other liens that arise by operation of
law, in each case, on any Mortgaged Property and arising solely as a result of an action or
omission of the related Borrowers) or (C) except as provided in the Basic Documents, permit
any Person other than itself, the Owner Trustee and the Noteholders to have any right,
title or interest in the Trust Estate;
(viii) remove the Administrator without the prior written consent of the
Majority Noteholders; or
(ix) take any other action or fail to take any action which may cause the
Trust to be taxable as (a) an association pursuant to Section 7701 of the Code and the
corresponding regulations, or (b) as a taxable mortgage pool pursuant to Section 7701(i) of
the Code.
Section 3.07. Performance of Obligations: Servicing of Loans.
(a) The Issuer will not take any action and will use its best efforts not to permit
any action to be taken by others that would release any Person from any of such Person’s material
covenants or obligations under any instrument or agreement included in the Collateral or that would
result in the amendment, hypothecation, subordination, termination or discharge of, or impair the
validity or effectiveness of, any such instrument or agreement, except as expressly provided in the
Basic Documents or such other instrument or agreement.
(b) The Issuer may contract with or otherwise obtain the assistance of other Persons
(including, without limitation, the Administrator under the Administration Agreement) to assist it
in performing its duties under this Indenture, and any performance of such duties by a Person
identified to the Indenture Trustee in an Officer’s Certificate of the Issuer shall be deemed to be
action taken by the Issuer. Initially, the Issuer has contracted with the Servicer and the
Administrator to assist the Issuer in performing its duties under this Indenture.
(c) The Issuer will punctually perform and observe all of its obligations and
agreements contained in this Indenture, in the Basic Documents and in the instruments and
agreements included in the Collateral, including but not limited to (i) filing or causing to be
filed all UCC financing statements and continuation statements required to be filed by the terms of
this Indenture and the Sale and Servicing Agreement and (ii) recording or causing to be recorded
all Mortgages, Assignments of Mortgage, all intervening Assignments of Mortgage and all assumption
and modification agreements required to be recorded by the terms of the Sale and Servicing
Agreement, in accordance with and within the time periods provided for in this Indenture and/or the
Sale and Servicing Agreement, as applicable. Except as otherwise expressly provided therein, the
Issuer shall not waive, amend, modify, supplement or
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terminate any Basic Document or any provision thereof without the consent of the Indenture Trustee
and the Majority Noteholders.
(d) If the Issuer shall have knowledge of the occurrence of a Servicing Event of
Default, the Issuer shall promptly notify the Indenture Trustee and the Noteholder Agent thereof,
and shall specify in such notice the action, if any, the Issuer is taking with respect to such
default. If a Servicing Event of Default shall arise from the failure of the Servicer to perform
any of its duties or obligations under the Sale and Servicing Agreement with respect to the Loans,
the Issuer shall take all reasonable steps available to it to remedy such failure.
(e) Upon any termination of the Servicer’s rights and powers pursuant to the Sale
and Servicing Agreement, the Issuer shall promptly notify the Indenture Trustee. As soon as a
successor servicer is appointed, the Issuer shall notify the Indenture Trustee of such appointment,
specifying in such notice the name and address of such successor servicer.
(f) Without derogating from the absolute nature of the assignment granted to the
Indenture Trustee under this Indenture or the rights of the Indenture Trustee hereunder, the Issuer
agrees (i) that it will not, without the prior written consent of the Indenture Trustee, amend,
modify, waive, supplement, terminate or surrender, or agree to any amendment, modification,
supplement, termination, waiver or surrender of, the terms of any Collateral (except to the extent
otherwise permitted by the Sale and Servicing Agreement) or the Basic Documents, or waive timely
performance or observance by the Servicer or the Depositor under the Sale and Servicing Agreement;
and (ii) that any such amendment shall not (A) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, distributions that are required to be made for the benefit of
the Noteholders or (B) reduce the aforesaid percentage of the Notes that is required to consent to
any such amendment, without the consent of Noteholders evidencing 100% Percentage Interests of the
Outstanding Notes. If any such amendment, modification, supplement or waiver shall so be consented
to by the Indenture Trustee, the Issuer agrees, promptly following a request by the Indenture
Trustee to do so, to execute and deliver, in its own name and at its own expense, such agreements,
instruments, consents and other documents as the Indenture Trustee may deem necessary or
appropriate in the circumstances.
Section 3.08. Reserved.
Section 3.09. Annual Statement as to Compliance. So long as the Notes are
Outstanding, the Issuer will deliver to the Indenture Trustee, within 120 days after the end of
each fiscal year of the Issuer (commencing with the fiscal year beginning on May 1, 2006), an
Officer’s Certificate stating, as to the Authorized Officer signing such Officer’s Certificate,
that:
(i) a review of the activities of the Issuer during such year and of its
performance under this Indenture has been made under such Authorized Officer’s supervision;
and
(ii) to the best of such Authorized Officer’s knowledge, based on such
review, the Issuer has materially complied with all conditions and covenants under this
Indenture throughout such year, or, if there has been a default in its compliance with any
such condition or covenant, specifying each such default known to such Authorized Officer
and the nature and status thereof.
Section 3.10. Covenants of the Issuer. All covenants of the Issuer in this
Indenture are covenants of the Issuer and are not covenants of the Owner Trustee. The Owner Trustee
is, and any successor Owner Trustee under the Trust Agreement will be, entering into this Indenture
solely as Owner Trustee under the Trust Agreement and not in its respective individual capacity,
and in no case whatsoever shall the Owner Trustee or any such successor Owner Trustee be personally
liable on, or for
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any loss in respect of, any of the statements, representations, warranties or obligations of the
Issuer hereunder, as to all of which the parties hereto agree to look solely to the property of the
Issuer.
Section 3.11. Servicer’s Obligations. The Issuer shall cause the Servicer to
comply with the Sale and Servicing Agreement.
Section 3.12. Restricted Payments. The Issuer shall not, directly or indirectly,
(i) pay any dividend or make any distribution (by reduction of capital or otherwise), whether in
cash, property, securities or a combination thereof, to the Owner Trustee or any owner of a
beneficial interest in the Issuer or otherwise with respect to any ownership or equity interest or
security in or of the Issuer or to the Servicer, (ii) redeem, purchase, retire or otherwise acquire
for value any such ownership or equity interest or security or (iii) set aside or otherwise
segregate any amounts for any such purpose; provided, however, that the Issuer may make, or cause
to be made, (x) distributions to the Servicer, the Indenture Trustee, the Owner Trustee and the
Noteholders and the holders of the Trust Certificates as contemplated by, and to the extent funds
are available for such purpose under, the Sale and Servicing Agreement or the Trust Agreement and
(y) payments to the Administrator pursuant to Section 4 of the Administration Agreement.
The Issuer will not, directly or indirectly, make or cause to be made payments to or distributions
from the Distribution Account except in accordance with this Indenture and the Basic Documents.
Section 3.13. Treatment of Notes as Debt for All Purposes. The Issuer shall, and
shall cause the Administrator to, treat the Notes as indebtedness for all purposes.
Section 3.14. Notice of Events of Default. The Issuer shall give the Indenture
Trustee and the Noteholder Agent prompt written notice of each Event of Default hereunder and each
default on the part of the Servicer or the Loan Originator of their respective obligations under
any of the Basic Documents.
Section 3.15. Further Instruments and Acts. Upon request of the Indenture
Trustee, the Issuer will execute and deliver such further instruments and do such further acts as
may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture.
ARTICLE IV
SATISFACTION AND DISCHARGE
Section 4.01. Satisfaction and Discharge of Indenture. This Indenture shall cease
to be of further effect with respect to the Notes (except as to (i) rights of registration of
transfer and exchange, (ii) substitution of mutilated, destroyed, lost or stolen Notes, (iii)
rights of Noteholders to receive payments of principal thereof and interest thereon, (iv)
Sections 3.03, 3.04 and 3.10 hereof, (v) the rights, obligations and
immunities of the Indenture Trustee hereunder (including the rights of the Indenture Trustee under
Section 6.07 hereof and the obligations of the Indenture Trustee under Section 4.02
hereof) and (vi) the rights of Noteholders as beneficiaries hereof with respect to the property so
deposited with the Indenture Trustee payable to all or any of them), and the Indenture Trustee, on
demand of and at the expense of the Issuer, shall execute proper instruments satisfactory to it,
and prepared and delivered to it by the Issuer, acknowledging satisfaction and discharge of this
Indenture with respect to the Notes, when all of the following have occurred:
(A) either
| (1) | all Notes theretofore authenticated and delivered (other than (i) Notes that have been destroyed, lost or stolen and that have been replaced or |
19
| paid as provided in Section 2.04 hereof and (ii) Notes for the payment of which money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust, as provided in Section 3.03 hereof) shall have been delivered to the Indenture Trustee for cancellation; or |
| (2) | all Notes not theretofore delivered to the Indenture Trustee for cancellation |
| a. | shall have become due and payable, or | ||
| b. | are to be called for redemption within one year under arrangements satisfactory to the Indenture Trustee for the giving of notice of redemption by the Indenture Trustee in the name, and at the expense, of the Issuer, | ||
| c. | and the Issuer, in the case of clause a. or b. above, has irrevocably deposited or caused irrevocably to be deposited with the Indenture Trustee cash or direct obligations of or obligations guaranteed by the United States of America (which will mature prior to the date such amounts are payable), in trust for such purpose, in an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Indenture Trustee for cancellation when due to the applicable Maturity Date or the Redemption Date (if Notes shall have been called for redemption pursuant to Section 10.01 hereof), as the case may be; and |
(B) the latest of (a) the payment in full of all outstanding obligations under the
Notes, (b) the payment in full of all unpaid Trust Fees and Expenses and (c) the date on which the
Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; and
(C) the Issuer shall have delivered to the Indenture Trustee an Officer’s Certificate
and an Opinion of Counsel, each meeting the applicable requirements of Section 11.01 hereof
and, subject to Section 11.02 hereof, each stating that all conditions precedent herein
provided for, relating to the satisfaction and discharge of this Indenture with respect to the
Notes, have been complied with.
Section 4.02. Application of Trust Money. All moneys deposited with the Indenture
Trustee pursuant to Sections 3.03 and 4.01 hereof shall be held in trust and applied by it,
in accordance with the provisions of the Notes and this Indenture, to the payment, either directly
or through any Paying Agent, as the Indenture Trustee may determine, to the Noteholders for the
payment or redemption of which such moneys have been deposited with the Indenture Trustee, of all
sums due and to become due thereon for principal and/or interest; but such moneys need not be
segregated from other funds except to the extent required herein or in the Sale and Servicing
Agreement or required by law.
Section 4.03. Repayment of Moneys Held by Paying Agent. In connection with the
satisfaction and discharge of this Indenture with respect to the Notes, all moneys then held by any
Paying Agent other than the Indenture Trustee under the provisions of this Indenture with respect
to such Notes shall, upon demand of the Issuer, be paid to the Indenture Trustee to be held and
applied according to Section 3.03 hereof and thereupon such Paying Agent shall be released from all further
liability with respect to such moneys.
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ARTICLE V
DEFAULTS AND REMEDIES
Section 5.01. Events of Default. “Event of Default,” wherever used herein, means
any one of the following events (whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or governmental body):
(a) notwithstanding any insufficiency of funds in the Distribution Account for
payment thereof on the related Payment Date, default in the payment of any interest on any Note
when the same becomes due and payable; or
(b) notwithstanding any insufficiency of funds in the Distribution Account for
payment thereof on the related Payment Date, default in the payment of any installment of the
Overcollateralization Shortfall of any Note (i) on any Payment Date or (ii) on the Maturity Date,
or, to the extent that there are funds available in the Distribution Account therefor, default in
the payment of any installment of the principal of any Note from such available funds, as a result
of the occurrence of a Rapid Amortization Trigger; or
(c) the occurrence of a Servicer Event of Default; or
(d) default in the observance or performance of any covenant or agreement of the
Issuer made in any Basic Document to which it is a party (other than a covenant or agreement, a
default in the observance or performance of which is elsewhere in this Section 5.01
specifically dealt with), or any representation or warranty of the Issuer made in any Basic
Document to which it is a party or in any certificate or other writing delivered pursuant thereto
or in connection therewith proving to have been incorrect in any material respect as of the time
when the same shall have been made, and such default shall continue or not be cured, or the
circumstance or condition in respect of which such misrepresentation or warranty was incorrect
shall not have been eliminated or otherwise cured, for a period of 30 days after there shall have
been given, by registered or certified mail, to the Issuer by the Indenture Trustee, or to the
Issuer, the Depositor and the Indenture Trustee by Noteholders evidencing at least 25% Percentage
Interests of the Outstanding Notes, a written notice specifying such default or incorrect
representation or warranty and requiring it to be remedied and stating that such notice is a notice
of Default hereunder; or
(e) default in the observance or performance of any covenant or agreement of the
Depositor or the Loan Originator made in any Basic Document to which it is a party or any
representation or warranty of the Depositor (except as otherwise expressly provided in the Basic
Documents with respect to representations and warranties regarding the Loans) or Loan Originator
made in any Basic Document to which it is a party, proving to have been incorrect in any material
respect as of the time when the same shall have been made, and such default shall continue or not
be cured, or the circumstance or condition in respect of which such misrepresentation or warranty
was incorrect shall not have been eliminated or otherwise cured, for a period of 30 days (or 5 days
in the case of the failure of the Loan Originator to make a payment in respect of the Transfer
Obligation) after there shall have been given, by registered or certified mail, to the Issuer and
the Depositor by the Indenture Trustee, or to the Issuer, the Depositor and the Indenture Trustee
by Noteholders evidencing at least 25% Percentage Interests of the Outstanding Notes, a
written notice specifying such Default or incorrect representation or warranty and requiring
it to be remedied and stating that such notice is a notice of Default hereunder; or
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(f) default in the observance or performance of any covenant or agreement of the
Loan Originator or any direct or indirect subsidiary (other than any domestic or offshore entities
established for the purpose of issuing net interest margin securities) made in any repurchase
agreement, loan and security agreement or other similar credit facility agreement entered into by
the Loan Originator or any such subsidiary and any third party for borrowed funds in excess of
$30,000,000, including any default which entitles any party to require acceleration or prepayment
of any indebtedness thereunder; or
(g) the filing of a decree or order for relief by a court having jurisdiction over
the Issuer, the Depositor or the Loan Originator or all or substantially all of the Collateral in
an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar
law now or hereafter in effect, or the appointing of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of the Issuer, the Depositor or the Loan Originator or
for all or substantially all of the Collateral, or the ordering of the winding-up or liquidation of
the affairs of the Issuer, the Depositor or the Loan Originator, and such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days; or
(h) the commencement by the Issuer, the Depositor or the Loan Originator of a
voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law
now or hereafter in effect, or the consent by the Issuer, the Depositor or the Loan Originator to
the entry of an order for relief in an involuntary case under any such law, or the consent by the
Issuer to the appointment or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of the Issuer, the Depositor or the Loan Originator or
for any substantial part of the Collateral, or the making by the Issuer, the Depositor or the Loan
Originator of any general assignment for the benefit of creditors, or the failure by the Issuer,
the Depositor or the Loan Originator generally to pay its respective debts as such debts become
due, or the taking of any action by the Issuer, the Depositor or the Loan Originator in furtherance
of any of the foregoing; or
(i) the Notes shall be Outstanding on the day after the end of the Revolving
Period; or
(j) a Change of Control of the Loan Originator.
The Loan Originator shall deliver to the Noteholders and Noteholder Agent written notice of
any Event of Default as set forth above under clauses (a) through (j). The Issuer shall deliver to
the Indenture Trustee, within five days after the occurrence thereof, written notice in the form of
an Officer’s Certificate of any event which with the giving of notice and the lapse of time would
become an Event of Default under clauses (d) or (e) above, the status of such event and what action
the Issuer or the Depositor, as applicable, is taking or proposes to take with respect thereto.
Section 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of
Default should occur and be continuing, then and in every such case the Indenture Trustee, at the
direction or upon the prior written consent of the Majority Noteholders, may declare all the Notes
to be immediately due and payable, by a notice in writing to the Issuer (and to the Indenture
Trustee if given by Noteholders), and upon any such declaration, the unpaid principal amount of
such Notes, together with accrued and unpaid interest thereon through the date of acceleration,
shall become immediately due and payable.
At any time after such declaration of acceleration of maturity has been made and before a
judgment or decree for payment of the moneys due has been obtained by the Indenture Trustee as
hereinafter in this Article V provided, the Majority Noteholders, by written notice to the
Issuer and the Indenture Trustee, may rescind and annul such declaration and its consequences if:
22
(a) the Issuer has paid or deposited with the Indenture Trustee a sum sufficient to
pay:
| 1. | all payments of principal of and/or interest on all Notes and all other amounts that would then be due hereunder or upon such Notes if the Event of Default giving rise to such acceleration had not occurred; and | ||
| 2. | all sums paid or advanced by the Indenture Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and its agents and counsel; and |
(b) all Events of Default, other than the nonpayment of the principal of the Notes
that has become due solely by such acceleration, have been cured or waived as provided in
Section 5.12 hereof. No such rescission shall affect any subsequent default or impair any
right consequent thereto.
Section 5.03. Collection of Indebtedness and Suits for Enforcement by Indenture
Trustee.
(a) The Issuer covenants that if (i) default is made in the payment of any interest
on any Note when the same becomes due and payable, and such default continues for a period of five
days, or (ii) default is made in the payment of the principal of or any installment of the
principal of any Note when the same becomes due and payable, the Issuer will, upon demand of the
Indenture Trustee, pay to the Indenture Trustee, for the benefit of the Noteholders, the whole
amount then due and payable on such Notes for principal and/or interest, with interest upon the
overdue principal and, to the extent payment at such rate of interest shall be legally enforceable,
upon overdue installments of interest at the rate borne by the Notes and in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and its
agents and counsel.
(b) In case the Issuer shall fail forthwith to pay such amounts upon such demand,
the Indenture Trustee shall at the direction of the Majority Noteholders, subject to Section
5.06(c) institute a Proceeding for the collection of the sums so due and unpaid, and may prosecute
such Proceeding to judgment or final decree, and may enforce the same against the Issuer or other
obligor upon such Notes and collect in the manner provided by law out of the property of the Issuer
or other obligor upon such Notes, wherever situated, the moneys adjudged or decreed to be payable.
(c) If an Event of Default occurs and is continuing, the Indenture Trustee shall at
the direction of the Majority Noteholders, as more particularly provided in Section 5.04
hereof, subject to Section 5.06(c) hereof, proceed to protect and enforce its rights and
the rights of the Noteholders by such appropriate Proceedings as the Indenture Trustee shall deem
most effective to protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy or legal or
equitable right vested in the Indenture Trustee by this Indenture or by law.
(d) In case there shall be pending, relative to the Issuer or any other obligor upon
the Notes or any Person having or claiming an ownership interest in the Collateral, Proceedings
under Title 11 of the United States Code or any other applicable federal or state bankruptcy,
insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken
possession of the Issuer or its property or such other obligor or Person, or in case of any other
comparable judicial Proceedings relative to the Issuer or other obligor upon the Notes, or to the
creditors or property of the Issuer or such other
23
obligor, the Indenture Trustee, irrespective of whether the principal of any Notes shall then be
due and payable as therein expressed or by declaration or otherwise and irrespective of whether the
Indenture Trustee shall have made any demand pursuant to the provisions of this Section
5.03, shall be entitled and empowered by intervention in such Proceedings or otherwise:
(i) to file and prove a claim or claims for the whole amount of principal
and/or interest owing and unpaid in respect of the Notes and to file such other papers or
documents as may be necessary or advisable in order to have the claims of the Indenture
Trustee (including any claim for reasonable compensation to the Indenture Trustee, each
predecessor Indenture Trustee, and its agents, attorneys and counsel, and for reimbursement
of all expenses and liabilities incurred, and all advances made, by the Indenture Trustee
and each predecessor Indenture Trustee, except as a result of negligence or bad faith) and
of the Noteholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to vote on behalf
of the Noteholders in any election of a trustee, a standby trustee or Person performing
similar functions in any such Proceedings;
(iii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute all amounts received with respect to the
claims of the Noteholders and the Indenture Trustee on their behalf; and
(iv) to file such proofs of claim and other papers or documents as may be
necessary or advisable in order to have the claims of the Indenture Trustee or the
Noteholders allowed in any judicial proceedings relative to the Issuer, its creditors and
its property; and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Noteholders to make payments to
the Indenture Trustee and, in the event that the Indenture Trustee shall consent to the
making of payments directly to such Noteholders, to pay to the Indenture Trustee such
amounts as shall be sufficient to cover reasonable compensation to the Indenture Trustee,
each predecessor Indenture Trustee and their respective agents, attorneys and counsel; and
all other expenses and liabilities incurred and all advances made by the Indenture Trustee
and each predecessor Indenture Trustee except as a result of negligence or bad faith.
(e) Nothing herein contained shall be deemed to authorize the Indenture Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any Noteholder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any
Holder thereof or to authorize the Indenture Trustee to vote in respect of the claim of any
Noteholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in
bankruptcy or similar Person.
(f) All rights of action and of asserting claims under this Indenture, or under any
of the Notes, may be enforced by the Indenture Trustee without the possession of any of the Notes
or the production thereof in any trial or other Proceedings relative thereto, and any such action or
Proceedings instituted by the Indenture Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements
and compensation of the Indenture Trustee, each predecessor Indenture Trustee and their respective
agents, attorneys and counsel, shall be for the ratable benefit of the Noteholders.
(g) In any Proceedings brought by the Indenture Trustee (and also any Proceedings
involving the interpretation of any provision of this Indenture to which the Indenture Trustee
shall be a
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party), the Indenture Trustee shall be held to represent all the Noteholders, and it shall not be
necessary to make any Noteholder a party to any such Proceedings.
Section 5.04. Remedies; Priorities.
(a) If an Event of Default shall have occurred and be continuing, the Indenture
Trustee, at the direction of the Majority Noteholders shall, do one or more of the following
(subject to Section 5.05 hereof):
(i) institute Proceedings in its own name and as trustee of an express trust
for the collection of all amounts then payable on the Notes or under this Indenture with
respect thereto, whether by declaration or otherwise, enforce any judgment obtained, and
collect from the Issuer and any other obligor upon such Notes moneys adjudged due;
(ii) institute Proceedings from time to time for the complete or partial
foreclosure of this Indenture with respect to the Collateral;
(iii) exercise any remedies of a secured party under the UCC and take any
other appropriate action to protect and enforce the rights and remedies of the Indenture
Trustee or the Noteholders; and
(iv) sell the Collateral or any portion thereof or rights or interest therein
in a commercially reasonable manner, at one or more public or private sales called and
conducted in any manner permitted by law; provided, however, that the Indenture Trustee may
not sell or otherwise liquidate the Collateral following an Event of Default, unless (A)
the Holders of 100% Percentage Interests of the Outstanding Notes consent thereto, (B) the
proceeds of such sale or liquidation distributable to the Noteholders are sufficient to
discharge in full all amounts then due and unpaid upon such Notes for principal and/or
interest or (C) the Indenture Trustee determines that the Collateral will not continue to
provide sufficient funds for the payment of principal of and interest on the Notes as they
would have become due if the Notes had not been declared due and payable, and the Indenture
Trustee obtains the consent of Holders of not less than 66-2/3% Percentage Interests of the
Outstanding Notes. In determining such sufficiency or insufficiency with respect to clause
(B) and (C) of this subsection (a)(iv), the Indenture Trustee may, but need not, obtain and
rely upon an opinion of an Independent investment banking or accounting firm of national
reputation as to the feasibility of such proposed action and as to the sufficiency of the
Collateral for such purpose.
(b) If the Indenture Trustee collects any money or property pursuant to this
Article V, it shall pay out the money or property in the following order:
FIRST: in the following order of priority: (a) to the Indenture Trustee, an amount
equal to all unreimbursed Indenture Trustee Fees and indemnities and any other amounts
payable to the
Indenture Trustee pursuant to the Basic Documents and to the Indenture Trustee or Sale
Agents, as applicable, all reasonable fees and expenses incurred by them and their agents
and representatives in connection with the enforcement of the remedies provided for in this
Article V, (b) to the Custodian, an amount equal to all unpaid Custodian Fees and
indemnities and any other amounts payable to the Custodian pursuant to the Basic Documents,
(c) to the Owner Trustee, an amount equal to all unreimbursed Owner Trustee Fees and
indemnities and any other amounts payable to the Owner Trustee pursuant to the Basic
Documents, and (d) to the Servicer, an amount equal to (i) all unreimbursed Servicing
Compensation and (ii) all unreimbursed Nonrecoverable Servicing Advances;
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SECOND: the Hedge Funding Requirement to the appropriate Hedging Counterparties (if
any);
THIRD: to the Noteholders pro rata, all amounts in respect of interest due and
owing under the Notes;
FOURTH: to the Noteholders pro rata, all amounts in respect of unpaid
principal of the Notes;
FIFTH: to the Purchasers or any other Indemnified Party (as each such term is defined
in the Note Purchase Agreement), amounts in respect of Issuer/Depositor Indemnities (as
defined in the Trust Agreement) and to the Noteholder Agent, amounts in respect of Due
Diligence Fees (as set forth in Section 11.15 of the Sale and Servicing Agreement)
until such amounts are paid in full;
SIXTH: to the Owner Trustee, for any amounts to be distributed pro rata to the holders
of the Trust Certificates pursuant to the Trust Agreement.
The Indenture Trustee may fix a record date and payment date for any payment to be made to the
Noteholders pursuant to this Section 5.04. At least 15 days before such record date, the
Indenture Trustee shall mail to each Noteholder and the Issuer a notice that states the record
date, the payment date and the amount to be paid.
Section 5.05. Optional Preservation of the Collateral. If the Notes have been
declared to be due and payable under Section 5.02 hereof following an Event of Default and
such declaration and its consequences have not been rescinded and annulled, the Indenture Trustee
may, but need not, elect to maintain possession of the Collateral. It is the desire of the parties
hereto and the Noteholders that there be at all times sufficient funds for the payment of principal
of and interest on the Notes, and the Indenture Trustee shall take such desire into account when
determining whether or not to maintain possession of the Collateral. In determining whether to
maintain possession of the Collateral, the Indenture Trustee may, but need not, obtain and rely
upon an opinion of an Independent investment banking or accounting firm of national reputation as
to the feasibility of such proposed action and as to the sufficiency of the Collateral for such
purpose.
Section 5.06. Limitation of Suits. No Noteholder shall have any right to
institute any Proceeding, judicial or otherwise, with respect to this Indenture or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless:
(a) such Noteholder has previously given written notice to the Indenture Trustee of
a continuing Event of Default;
(b) the Noteholders evidencing not less than 25% Percentage Interests of the
Outstanding Notes have made written request to the Indenture Trustee to institute such Proceeding
in respect of such Event of Default in its own name as Indenture Trustee hereunder;
(c) such Noteholder or Noteholders have offered to the Indenture Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in complying with such
request;
(d) the Indenture Trustee for 30 days after its receipt of such notice, request and
offer of indemnity has failed to institute such Proceeding; and
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(e) no direction inconsistent with such written request has been given to the
Indenture Trustee during such 30-day period by the Majority Noteholders.
It is understood and intended that no one or more Noteholders shall have any right in any
manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb
or prejudice the rights of any other Noteholders or to obtain or to seek to obtain priority or
preference over any other Noteholders or to enforce any right under this Indenture, except in the
manner herein provided.
In the event the Indenture Trustee shall receive conflicting or inconsistent requests and
indemnity from two or more groups of Noteholders, neither of which evidences Percentage Interests
of the Outstanding Notes greater than 50%, the Indenture Trustee in its sole discretion may
determine what action, if any, shall be taken, notwithstanding any other provisions of this
Indenture and shall have no obligation or liability to any such group of Noteholders for such
action or inaction.
Section 5.07. Unconditional Rights of Noteholders to Receive Principal and/or
Interest. Notwithstanding any other provisions in this Indenture, any Noteholder shall have the
right, which is absolute and unconditional, to receive payment of the principal of and interest, if
any, on such Note on or after the applicable Maturity Date thereof expressed in such Note or in
this Indenture (or, in the case of redemption, on or after the Redemption Date) and to institute
suit for the enforcement of any such payment, and such right shall not be impaired without the
consent of such Noteholder.
Section 5.08. Restoration of Rights and Remedies. If the Indenture Trustee or any
Noteholder has instituted any Proceeding to enforce any right or remedy under this Indenture and
such Proceeding has been discontinued or abandoned for any reason or has been determined adversely
to the Indenture Trustee or to such Noteholder, then and in every such case the Issuer, the
Indenture Trustee and the Noteholders shall, subject to any determination in such Proceeding, be
restored severally and respectively to their former positions hereunder, and thereafter all rights
and remedies of the Indenture Trustee and the Noteholders shall continue as though no such
Proceeding had been instituted.
Section 5.09. Rights and Remedies Cumulative. No right or remedy herein conferred
upon or reserved to the Indenture Trustee or to the Noteholders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 5.10. Delay or Omission Not a Waiver. No delay or omission of the
Indenture Trustee or any Noteholder to exercise any right or remedy accruing upon any Default or
Event of Default shall impair any such right or remedy or constitute a waiver of any such Default
or Event of Default or an acquiescence therein. Every right and remedy given by this Article V or
by law to the Indenture Trustee or to the Noteholders may be exercised from time to time, and as
often as may be deemed expedient, by the Indenture Trustee or by the Noteholders, as the case may
be.
Section 5.11. Control by Noteholders. The Majority Noteholders shall have the
right to direct the time, method and place of conducting any Proceeding for any remedy available to
the Indenture Trustee with respect to the Notes or exercising any trust or power conferred on the
Indenture Trustee; provided, however, that:
(a) such direction shall not be in conflict with any rule of law or with this Indenture;
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(b) subject to the express terms of Section 5.04(a)(iv) hereof, any
direction to the Indenture Trustee to sell or liquidate the Collateral shall be by Noteholders
representing Percentage Interests of the Outstanding Notes of not less than 100%;
(c) if the conditions set forth in Section 5.05 hereof have been satisfied
and the Indenture Trustee elects to retain the Collateral pursuant to such Section, then any
direction to the Indenture Trustee by Noteholders representing Percentage Interests of the
Outstanding Notes of less than 100% to sell or liquidate the Collateral shall be of no force and
effect; and
(d) the Indenture Trustee may take any other action deemed proper by the Indenture
Trustee that is not inconsistent with such direction.
In connection with any sale of the Collateral in accordance with paragraph (c) above, the
Majority Noteholders may, in their sole discretion appoint agents to effect the sale of the
Collateral (such agents, “Sale Agents”), which Sale Agents may be Affiliates of any
Noteholder. The Sale Agents shall be entitled to reasonable compensation in connection with such
activities from the proceeds of such sale.
Notwithstanding the rights of the Noteholders set forth in this Section 5.11, subject
to Section 6.01 hereof, the Indenture Trustee need not take any action that it determines
might involve it in liability or might materially adversely affect the rights of any Noteholders
not consenting to such action.
Section 5.12. Waiver of Past Defaults. The Majority Noteholders may waive any
past Default or Event of Default and its consequences, except a Default (a) in the payment of
principal of or interest on any of the Notes or (b) in respect of a covenant or provision hereof
that cannot be modified or amended without the consent of each Noteholder. In the case of any such
waiver, the Issuer, the Indenture Trustee, and Noteholders shall be restored to their former
positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereto.
Upon any such waiver, such Default shall cease to exist and be deemed to have been cured and
not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured
and not to have occurred, for every purpose of this Indenture; but no such waiver shall extend to
any subsequent or other Default or Event of Default or impair any right consequent thereto.
Section 5.13. Undertaking for Costs. All parties to this Indenture agree, and
each Noteholder by such Noteholder’s acceptance thereof shall be deemed to have agreed, that any
court may in
its discretion require, in any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Indenture Trustee for any action taken, suffered or omitted
by it as Indenture Trustee, the filing by any party litigant in such suit of an undertaking to pay
the costs of such suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys’ fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant; but the provisions
of this Section 5.13 shall not apply to (a) any suit instituted by the Indenture Trustee,
(b) any suit instituted by any Noteholder, or group of Noteholders, in each case holding in the
aggregate Percentage Interests of the Outstanding Notes of more than 10% or (c) any suit instituted
by any Noteholder for the enforcement of the payment of principal of or interest on any Note on or
after the respective due dates expressed in such Note and in this Indenture (or, in the case of
redemption, on or after the Redemption Date).
Section 5.14. Waiver of Stay or Extension Laws. The Issuer covenants (to the
extent that it may lawfully do so) that it will not at any time insist upon, or plead or in any
manner whatsoever, claim or take the benefit or advantage of, any stay or extension law wherever
enacted, now or at any time
28
hereafter in force, that may affect the covenants or the performance of this Indenture; and the
Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage
of any such law, and covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Indenture Trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.
Section 5.15. Action on Notes. The Indenture Trustee’s right to seek and recover
judgment on the Notes or under this Indenture shall not be affected by the seeking, obtaining or
application of any other relief under or with respect to this Indenture. Neither the lien of this
Indenture nor any rights or remedies of the Indenture Trustee or the Noteholders shall be impaired
by the recovery of any judgment by the Indenture Trustee against the Issuer or by the levy of any
execution under such judgment upon any portion of the Collateral or upon any of the assets of the
Issuer. Any money or property collected by the Indenture Trustee shall be applied in accordance
with Section 5.04(b) hereof.
Section 5.16. Performance and Enforcement of Certain Obligations.
(a) Promptly following a request from the Indenture Trustee to do so and at the
Administrator’s expense, the Issuer shall take all such lawful action as the Indenture Trustee may
request to compel or secure the performance and observance by the Loan Originator and the Servicer,
as applicable, of each of their obligations to the Issuer under or in connection with the Sale and
Servicing Agreement or the Loan Purchase and Contribution Agreement, and to exercise any and all
rights, remedies, powers and privileges lawfully available to the Issuer under or in connection
with the Sale and Servicing Agreement to the extent and in the manner directed by the Indenture
Trustee, including the transmission of notices of default on the part of the Loan Originator or the
Servicer thereunder and the institution of legal or administrative actions or proceedings to compel
or secure performance by the Loan Originator or the Servicer of each of their obligations under the
Sale and Servicing Agreement and the Loan Purchase and Contribution Agreement.
(b) If an Event of Default has occurred and is continuing, the Indenture Trustee
may, and at the direction (which direction shall be in writing or by telephone, confirmed in
writing promptly thereafter) of the Majority Noteholders shall, subject to Section 5.06(c)
exercise all rights, remedies, powers, privileges and claims of the Issuer against the Loan
Originator or the Servicer under or in connection with the Sale and Servicing Agreement or the Loan
Purchase and Contribution Agreement, including the right or power to take any action to compel or
secure performance or observance by the Loan Originator or the Servicer, as the case may be, of
each of their obligations to the Issuer thereunder and to
give any consent, request, notice, direction, approval, extension, or waiver under the Sale
and Servicing Agreement, and any right of the Issuer to take such action shall be suspended.
ARTICLE VI
THE INDENTURE TRUSTEE
Section 6.01. Duties of Indenture Trustee.
(a) If an Event of Default has occurred and is continuing, the Indenture Trustee
shall exercise the rights and powers vested in it by this Indenture and use the same degree of care
and skill in their exercise as a prudent person would exercise or use under the circumstances in
the conduct of such person’s own affairs.
(b) Except during the continuance of an Event of Default:
29
(i) the Indenture Trustee shall undertake to perform such duties and only such duties as are
specifically set forth in this Indenture and no implied covenants or obligations shall be read into
this Indenture against the Indenture Trustee; and
(ii) in the absence of bad faith on its part, the Indenture Trustee may conclusively rely, as to
the truth of the statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of
this Indenture; provided, however, that the Indenture Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements of this Indenture to the
extent specifically set forth herein.
(c) The Indenture Trustee may not be relieved from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of this Section 6.01;
(ii) the Indenture Trustee shall not be liable for any error of judgment made in good faith by a
Responsible Officer unless it is proved that the Indenture Trustee was negligent in ascertaining
the pertinent facts; and
(iii) the Indenture Trustee shall not be liable with respect to any action it takes or omits to
take in good faith in accordance with a direction received by it pursuant to Section 5.11
hereof.
(d) The Indenture Trustee shall not be liable for interest on any money received by it and held in
a Trust Account except as may be provided in the Sale and Servicing Agreement or as the Indenture
Trustee may agree in writing with the Issuer.
(e) Money held in trust by the Indenture Trustee shall be segregated from other funds except to the
extent permitted by law or the terms of this Indenture or the Sale and Servicing Agreement.
(f) No provision of this Indenture shall require the Indenture Trustee to expend or risk its own
funds or otherwise incur financial liability in the performance of any of its duties hereunder or
in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that
repayment of such funds or adequate indemnity against such risk or liability is not reasonably
assured to it; provided, however, that the Indenture Trustee shall not refuse or fail to perform
any of its duties hereunder solely as a result of nonpayment of its normal fees and expenses and
provided, further, that nothing in this Section 6.01(f) shall be construed to limit the
exercise by the Indenture Trustee of any right or remedy permitted under this Indenture or
otherwise in the event of the Issuer’s failure to pay the Indenture Trustee’s fees and expenses
pursuant to Section 6.07 hereof.
(g) Every provision of this Indenture relating to the conduct or affecting the liability of or
affording protection to the Indenture Trustee shall be subject to the provisions of this
Section 6.01.
(h) The Indenture Trustee shall not be required to take notice or be deemed to have notice or
knowledge of any Event of Default (other than an Event of Default pursuant to Section 5.01(a)
or (b) hereof) unless a Responsible Officer of the Indenture Trustee shall have received
written notice thereof or otherwise shall have actual knowledge thereof. In the absence of receipt
of notice or such knowledge, the Indenture Trustee may conclusively assume that there is no Event
of Default.
30
Section 6.02. Rights of Indenture Trustee. (a) The Indenture Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by the proper person.
The Indenture Trustee need not investigate any fact or matter stated in the document.
(b) Before the Indenture Trustee acts or refrains from acting, it may require an Officer’s
Certificate or an Opinion of Counsel. The Indenture Trustee shall not be liable for any action it
takes or omits to take in good faith in reliance on an Officer’s Certificate or Opinion of Counsel.
(c) The Indenture Trustee may execute any of the trusts or powers hereunder or perform any duties
hereunder either directly or by or through agents or attorneys or a custodian or nominee.
(d) The Indenture Trustee shall not be liable for (i) any action it takes or omits to take in good
faith which it believes to be authorized or within its rights or powers; provided, however, that
such action or omission by the Indenture Trustee does not constitute willful misconduct, negligence
or bad faith; or (ii) any action or inaction on the part of the Custodian.
(e) The Indenture Trustee may consult with counsel, and the advice or opinion of counsel with
respect to legal matters relating to this Indenture and the Notes shall be full and complete
authorization and protection from liability in respect to any action taken, omitted or suffered by
it hereunder in good faith and in accordance with the advice or opinion of such counsel.
Section 6.03. Individual Rights of Indenture Trustee. The Indenture Trustee in its
individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal
with the Issuer or its Affiliates with the same rights it would have if it were not Indenture
Trustee. Any Paying Agent, Note Registrar, co-registrar or co-paying agent may do the same with
like rights. However, the Indenture Trustee must comply with Section 6.11 hereof.
Section 6.04. Indenture Trustee’s Disclaimer. The Indenture Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of this Indenture or the
Notes, shall not be accountable for the Issuer’s use of the proceeds from the Notes, or responsible
for any statement of the Issuer in the Indenture or in any document issued in connection with the
sale of the Notes or in the Notes other than the Indenture Trustee’s certificate of authentication.
Section 6.05. Notices of Default. If a Default occurs and is continuing and if it is
actually known to a Responsible Officer of the Indenture Trustee, the Indenture Trustee shall mail
to each Noteholder and each party to the Master Disposition Confirmation Agreement notice of the
Default within two Business Days after it receives actual notice of such occurrence.
Section 6.06. Reports by Indenture Trustee to Holders. The Indenture Trustee shall deliver
to each Noteholder such information specifically requested by each Noteholder and in the Indenture
Trustee’s possession and as may be reasonably required to enable such Noteholder to prepare its
federal and state income tax returns.
Section 6.07. Compensation and Indemnity. As compensation for its services hereunder, the
Indenture Trustee shall be entitled to receive, on each Payment Date, the Indenture Trustee’s Fee
pursuant to Section 8.02(c) hereof (which compensation shall not be limited by any law on
compensation of a trustee of an express trust) and shall be entitled to reimbursement by the
Servicer for all reasonable out-of-pocket expenses incurred or made by it, including costs of
collection, in addition to the compensation for its services. Such expenses shall include the
reasonable compensation and expenses, disbursements and advances of the Indenture Trustee’s agents,
counsel, accountants and
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experts. The Issuer agrees to cause the Servicer to indemnify the Indenture Trustee, the
Custodian, the Paying Agent and their officers, directors, employees and agents against any and all
loss, liability or expense (including reasonable attorneys’ fees) incurred by it or them in
connection with the administration of this trust and the performance of its or their duties under
the Basic Documents. The Indenture Trustee shall notify the Issuer and the Servicer promptly of any
claim for which it may seek indemnity. Failure by the Indenture Trustee so to notify the Issuer and
the Servicer shall not relieve the Issuer or the Servicer of its or their obligations hereunder.
The Issuer shall, or shall cause the Servicer to, defend any such claim; provided, however, that if
the defendants with respect to any such claim include the Issuer and/or the Servicer and the
Indenture Trustee, and the Indenture Trustee shall have reasonably concluded that there may be
legal defenses available to it which are different from or in addition to those defenses available
to the Issuer or the Servicer, as the case may be, the Indenture Trustee shall have the right, at
the expense of the Servicer, to select separate counsel to assert such legal defenses and to
otherwise defend itself against such claim. Neither the Issuer nor the
Servicer need reimburse any expense or indemnify against any loss, liability or expense incurred by
the Indenture Trustee through the Indenture Trustee’s own willful misconduct, negligence or bad
faith.
The Issuer’s payment obligations to the Indenture Trustee pursuant to this Section 6.07
shall survive the discharge of this Indenture and the termination or resignation of the Indenture
Trustee. When the Indenture Trustee incurs expenses after the occurrence of a Default specified in
Section 5.01(e) or (f) hereof with respect to the Issuer, the expenses are intended to
constitute expenses of administration under Title 11 of the United States Code or any other
applicable federal or state bankruptcy, insolvency or similar law.
Notwithstanding anything in this Section 6.07 to the contrary, all amounts due the
Indenture Trustee hereunder shall be payable in the first instance by the Servicer and, if not paid
by the Servicer within 60 days after payment is requested from the Servicer by the Indenture
Trustee, in accordance with the priorities set forth in Section 5.01 of the Sale and Servicing
Agreement.
Section 6.08. Replacement of Indenture Trustee. No resignation or removal of the Indenture
Trustee and no appointment of a successor Indenture Trustee shall become effective until the
acceptance of appointment by the successor Indenture Trustee pursuant to this Section 6.08.
The Indenture Trustee may resign at any time by so notifying the Issuer. The Majority Noteholders
may remove the Indenture Trustee (with the consent of the Majority Certificateholders, not to be
unreasonably withheld) by so notifying the Indenture Trustee and may appoint a successor Indenture
Trustee; provided, that all of the reasonable costs and expenses incurred by the Indenture Trustee
in connection with such removal shall be reimbursed to it prior to the effectiveness of such
removal. The Issuer shall remove the Indenture Trustee if
| (a) | the Indenture Trustee fails to comply with Section 6.11 hereof, | ||
| (b) | the Indenture Trustee is adjudged a bankrupt or insolvent; | ||
| (c) | a receiver or other public officer takes charge of the Indenture Trustee or its property; or | ||
| (d) | the Indenture Trustee otherwise becomes incapable of acting. |
If the Indenture Trustee resigns or is removed or if a vacancy exists in the office of Indenture
Trustee for any reason (the Indenture Trustee in such event being referred to herein as the
retiring Indenture Trustee), the Issuer shall promptly appoint a successor Indenture Trustee.
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A successor Indenture Trustee shall deliver a written acceptance of its appointment to the
retiring Indenture Trustee and to the Issuer. Thereupon the resignation or removal of the retiring
Indenture Trustee shall become effective, and the successor Indenture Trustee shall have all the
rights, powers and duties of the Indenture Trustee under this Indenture. The successor Indenture
Trustee shall mail a notice of its succession to Noteholders. The retiring Indenture Trustee shall
promptly transfer all property held by it as Indenture Trustee to the successor Indenture Trustee.
If a successor Indenture Trustee does not take office within 60 days after the retiring Indenture
Trustee resigns or is removed, the retiring Indenture Trustee, the Issuer or the Majority
Noteholders may petition any court of competent jurisdiction for the appointment of a successor
Indenture Trustee.
If the Indenture Trustee fails to comply with Section 6.11 hereof, any Noteholder may
petition any court of competent jurisdiction for the removal of the Indenture Trustee and the
appointment of a successor Indenture Trustee.
Notwithstanding the replacement of the Indenture Trustee pursuant to this Section 6.08, the
Issuer’s and the Administrator’s obligations under Section 6.07 hereof shall continue for
the benefit of the retiring Indenture Trustee.
Section 6.09. Successor Indenture Trustee by Merger. If the Indenture Trustee consolidates
with, merges or converts into, or transfers all or substantially all its corporate trust business
or assets to, another corporation or banking association, the resulting, surviving or transferee
corporation without any further act shall be the successor Indenture Trustee; provided, however,
that such corporation or banking association shall otherwise be qualified and eligible under
Section 6.11 hereof. The Indenture Trustee shall provide the Majority Noteholders prior
written notice of any such transaction.
In case at the time such successor or successors by merger, conversion or consolidation to the
Indenture Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have
been authenticated but not delivered, any such successor to the Indenture
Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such
Notes so authenticated; and in case at that time any of the Notes shall not have been
authenticated, any successor to the Indenture Trustee may authenticate such Notes either in the
name of any predecessor hereunder or in the name of the successor to the Indenture Trustee; and in
all such cases such certificates shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Indenture Trustee shall have.
Section 6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee.
(a) Notwithstanding any other provisions of this Indenture, at any time, for the purpose of meeting
any legal requirement of any jurisdiction in which any part of the Collateral may at the time be
located, the Indenture Trustee shall have the power and may execute and deliver all instruments to
appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate
trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity
and for the benefit of the Noteholders, such title to the Collateral, or any part hereof, and,
subject to the other provisions of this Section 6.10, such powers, duties, obligations,
rights and trusts as the Indenture Trustee may consider necessary or desirable. No co-trustee or
separate trustee hereunder shall be required to meet the terms of eligibility as a successor
trustee under Section 6.11 hereof and no notice to Noteholders of the appointment of any
co-trustee or separate trustee shall be required under Section 6.08 hereof.
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(b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed
and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred or imposed upon the Indenture Trustee
shall be conferred or imposed upon and exercised or performed by the Indenture Trustee and such
separate trustee or co-trustee jointly (it being understood that such separate trustee or
co-trustee is not authorized to act separately without the Indenture Trustee joining in such act),
except to the extent that under any law of any jurisdiction in which any particular act or acts are
to be performed the Indenture Trustee shall be incompetent or unqualified to perform such act or
acts, in which event such rights, powers, duties and obligations (including the holding of title to
the Collateral or any portion thereof in any such jurisdiction) shall be exercised and performed
singly by such separate trustee or co-trustee, but solely at the direction of the Indenture
Trustee;
(ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other
trustee hereunder; and
(iii) the Indenture Trustee may at any time accept the resignation of or remove any separate
trustee or co-trustee.
(c) Any notice, request or other writing given to the Indenture Trustee shall be deemed to have
been given to each of the then separate trustees and co-trustees, as effectively as if given to
each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this
Indenture and the conditions of this Article VI. Each separate trustee and co-trustee, upon
its acceptance of the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, jointly with the Indenture Trustee, subject to all the provisions of
this Indenture, specifically including every provision of this Indenture relating to the conduct
of, affecting the liability of, or affording protection to, the Indenture Trustee. Every such
instrument shall be filed with the Indenture Trustee.
(d) Any separate trustee or co-trustee may at any time constitute the Indenture Trustee its agent
or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any
lawful act under or in respect of this Indenture on its behalf and in its name. If any separate
trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its
estates, properties, rights, remedies and trusts shall vest in and be exercised by the Indenture
Trustee, to the extent permitted by law, without the appointment of a new or successor trustee.
Section 6.11. Eligibility. The Indenture Trustee shall (i) have a combined capital and
surplus of at least $50,000,000 as set forth in its most recent published annual report of
condition or (ii) otherwise be acceptable in writing to the Majority Noteholders.
ARTICLE VII
NOTEHOLDERS’ LISTS AND REPORTS
Section 7.01. Issuer to Furnish Indenture Trustee Names and Addresses of Noteholders. The
Issuer will furnish or cause to be furnished to the Indenture Trustee (a) not more than five days
after the earlier of (i) each Record Date and (ii) three months after the last Record Date, a list,
in such form as the Indenture Trustee may reasonably require, of the names and addresses of the
Noteholders as of such Record Date, (b) at such other times as the Indenture Trustee may request in
writing, within 30 days after receipt by the Issuer of any such request, a list of similar form and
content as
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of a date not more than 10 days prior to the time such list is furnished; provided, however,
that so long as the Indenture Trustee is the Note Registrar, no such list shall be required to be
furnished.
Section 7.02. Preservation of Information. The Indenture Trustee shall preserve, in as
current a form as is reasonably practicable, the names and addresses of the Noteholders contained
in the most recent list furnished to the Indenture Trustee as provided in Section 7.01
hereof and the names and addresses of Noteholders received by the Indenture Trustee in its capacity
as Note Registrar. The Indenture Trustee may destroy any list furnished to it as provided in such
Section 7.01 upon receipt of a new list so furnished.
Section 7.03. 144A Information.
(a) To permit compliance with the Securities Act in connection with the sale of the Notes sold in
reliance on Rule 144A, the Issuer shall furnish to the Indenture Trustee the information required
to be delivered under Rule 144A(d)(4) under the Securities Act, if the Issuer is neither a
reporting company under Section 13 or Section 15(d) of the United States Securities Exchange Act of
1934, as amended, nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act.
(b) The Indenture Trustee, to the extent it has any such information in its possession, shall
provide to any Noteholder and any prospective transferee designated by any such Noteholder
information regarding the Notes and the Loans and such other information as shall be necessary to
satisfy the condition to eligibility set forth in Rule 144A(d)(4) under the Securities Act for
transfer of any such Note without registration thereof under the Securities Act pursuant to the
registration exemption provided by Rule 144A under the Securities Act.
ARTICLE VIII
ACCOUNTS, DISBURSEMENTS AND RELEASES
Section 8.01. Collection of Money. General. Except as otherwise expressly provided
herein, the Indenture Trustee may demand payment or delivery of, and shall receive and collect,
directly and without intervention or assistance of any intermediary, all money and other property
payable to or receivable by the Indenture Trustee pursuant to this Indenture. The Indenture Trustee
shall apply all such money received by it as provided in this Indenture. Except as otherwise
expressly provided in this Indenture, if any default occurs in the making of any payment or
performance under any agreement or instrument that is part of the Collateral, the Indenture Trustee
may take such action as may be appropriate to enforce such payment or performance, including the
institution and prosecution of appropriate Proceedings. Any such action shall be without prejudice
to any right to claim a Default or Event of Default under this Indenture and any right to proceed
thereafter as provided in Article V hereof.
Section 8.02. Trust Accounts; Distributions.
(a) On or prior to the Closing Date, the Issuer shall cause the Servicer to establish and maintain,
in the name of the Indenture Trustee for the benefit of the Noteholders, or on behalf of the Owner
Trustee for the benefit of the Securityholders, the Trust Accounts as provided in the Sale and
Servicing Agreement. The Servicer shall deposit amounts into each of the Trust Accounts in
accordance with the terms hereof, the Sale and Servicing Agreement and the Payment Statements.
(b) Collection Account. With respect to the Collection Account, the Paying Agent shall make
such withdrawals and distributions as specified in Section 5.01(c)(1) of the Sale and Servicing
Agreement in accordance with the terms thereof.
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(c) Distribution Account. With respect to the Distribution Account, the Paying Agent
shall make (i) such deposits as specified in Sections 5.01(c)(2)(i), 5.01(c)(2)(ii), 5.05(e),
5.05(f), 5.05(g), and 5.05(h) of the Sale and Servicing Agreement and (ii) such withdrawals and
distributions as specified in Section 5.01(c)(3) of the Sale and Servicing Agreement in accordance
with the terms thereof.
(d) Transfer Obligation Account. With respect to the Transfer Obligation Account, the
Paying Agent shall make (i) such deposits as specified in Section 5.01(c)(3)(vii) of the Sale and
Servicing Agreement and (ii) such withdrawals and distributions as specified in Sections 5.05(d),
5.05(e), 5.05(f), 5.05(g), 5.05(h), and 5.05(i) of the Sale and Servicing Agreement in accordance
with the terms thereof.
(e) Advance Account. With respect to the Advance Account, the Issuer shall cause the
Servicer to make such withdrawals specified in Section 2.06 of the Sale and Servicing
Agreement.
Section 8.03. General Provisions Regarding Trust Accounts.
(a) All or a portion of the funds in the Collection Account and the Transfer Obligation Account
shall be invested in Permitted Investments in accordance with the provisions of Section 5.03(b) of
the Sale and Servicing Agreement. The Indenture Trustee will not make any investment of any funds
or sell any investment held in the Collection Account and the Transfer Obligation Account (other
than in Permitted Investments in accordance with Section 5.03(b) of the Sale and Servicing
Agreement) unless the security interest Granted and perfected in such account will continue to be
perfected in such investment or the proceeds of such sale, in either case without any further
action by any Person, as evidenced by an Opinion of Counsel delivered to the Indenture Trustee by
the Noteholder Agent or the Servicer, as the case may be.
(b) Subject to Section 6.01(c) hereof, the Indenture Trustee shall not in any way be held liable by
reason of any insufficiency in the Collection Account or the Transfer Obligation Account resulting
from any loss on any Permitted Investments included therein.
(c) If (i) the Noteholder Agent or the Servicer, as the case may be, shall have failed to give
investment directions for any funds on deposit in the Collection Account or the Transfer Obligation
Account to the Indenture Trustee by 2:00 p.m. New York City time (or such other time as may be
agreed by the Issuer and Indenture Trustee) on any Business Day or (ii) a Default or Event of
Default shall have occurred and be continuing with respect to the Notes but the Notes shall not
have been declared due and payable pursuant to Section 5.02 hereof or (iii) if such Notes
shall have been declared due and payable following an Event of Default, amounts collected or
receivable from the Collateral are being applied in accordance with Section 5.05 hereof as
if there had not been such a declaration, then the Indenture Trustee shall, to the fullest extent
practicable, invest and reinvest funds in the Collection Account and the Transfer Obligation
Account in one or more Permitted Investments specified in item (3) in the definition thereof.
Section 8.04. The Paying Agent. The initial Paying Agent shall be the Servicer. The Paying
Agent may be removed by the Noteholder Agent in its sole discretion at any time. Upon removal of
the Paying Agent, the Noteholder Agent will appoint a successor Paying Agent within 30 days which,
if other than the Servicer, must be a Person that is a Depository Institution and meets the
eligibility standards for the Indenture Trustee specified in Section 6.11 hereof; provided
that the Indenture Trustee will be the Paying Agent until such successor is appointed. Upon
receiving written notice from the Noteholder Agent that the Paying Agent has been terminated, the
Indenture Trustee will immediately terminate the Paying Agent’s access to any and all Trust
Accounts. If the Servicer or any subsequent Paying Agent is terminated as Paying Agent, the
Indenture Trustee shall be the Paying Agent until
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another Paying Agent is appointed by the Noteholder Agent pursuant to this Section
8.04. The Indenture Trustee shall be entitled to reasonable additional compensation for
assuming the role of Paying Agent.
Section 8.05. Release of Collateral.
(a) Subject to the payment of its reasonable fees and expenses pursuant to Section 6.07
hereof, the Indenture Trustee may, and when required by the provisions of this Indenture shall,
execute instruments acceptable to it and prepared and delivered to it by the Issuer to release
property from the lien of this Indenture, or convey the Indenture Trustee’s interest in the same,
without recourse, representation or warranty in a manner as provided in the Custodial Agreement and
under circumstances that are not inconsistent with the provisions of this Indenture and the other
Basic Documents. No party relying upon an instrument executed by the Indenture Trustee as provided
in this Article VIII shall be bound to ascertain the Indenture Trustee’s authority, inquire
into the satisfaction of any conditions precedent or see to the application of any moneys.
(b) The Indenture Trustee shall, at such time as there are no Notes Outstanding and all sums due to
the Noteholders (and their Affiliates), the Noteholder Agent, the Sales Agents, the Indenture
Trustee, the Owner Trustee and the Custodian under the Basic Documents have been paid, release any
remaining portion of the Collateral that secured the Notes from the lien of this Indenture and
release to the Issuer or any other Person entitled thereto any funds then on deposit in the Trust
Accounts. At such time as the lien of this Indenture is released, the Indenture Trustee shall cause
a termination statement to be filed in any jurisdiction where a UCC financing statement has been
filed hereunder with respect to the Collateral. The Indenture Trustee shall release property from
the lien of this Indenture pursuant to this subsection (b) only upon receipt of an Issuer
Request accompanied by an Officer’s Certificate and an Opinion of Counsel meeting the applicable
requirements of Section 11.01 hereof.
Section 8.06. Opinion of Counsel. Except to the extent specifically permitted by the terms
of the Basic Documents, the Indenture Trustee shall receive at least seven (7) Business Days’ prior
notice when requested by the Issuer to take any action pursuant to Section 8.05(a) hereof,
accompanied by copies of any instruments involved, and the Indenture Trustee may also require, as a
condition to such action, an Opinion of Counsel, in form and substance satisfactory to the
Indenture Trustee, from the Issuer concluding that all conditions precedent to the taking of such
action have been complied with and such action will not materially and adversely impair the
security for the Notes or the rights of the Noteholders in contravention of the provisions of this
Indenture; provided, however, that such Opinion of Counsel shall not be required to express an
opinion as to the fair value of the Collateral. Counsel rendering any such opinion may rely,
without independent investigation, on the accuracy and validity of any certificate or other
instrument delivered to the Indenture Trustee in connection with any such action.
ARTICLE IX
SUPPLEMENTAL INDENTURES
Section 9.01. Supplemental Indentures Without the Consent of the Noteholders. Without the
consent of any Noteholder but with prior notice to the Majority Noteholders, the Issuer and the
Indenture Trustee, at any time and from time to time, may enter into one or more indentures
supplemental hereto, in form satisfactory to the Indenture Trustee, for any of the following
purposes:
(i) to correct or amplify the description of any property at any time subject to the lien of this
Indenture, or better to assure, convey and confirm unto the Indenture Trustee any property subject
or required to be subjected to the lien of this Indenture, or to subject to the lien of this
Indenture additional property;
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(ii) to evidence the succession, in compliance with the applicable provisions hereof, of
another Person to the Issuer, and the assumption by any such successor of the covenants of the
Issuer herein and in the Notes contained;
(iii) to add to the covenants of the Issuer, for the benefit of the Noteholders, or to surrender
any right or power herein conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to or with the Indenture Trustee;
(v) to cure any ambiguity, to correct or supplement any provision herein or in any supplemental
indenture that may be inconsistent with any other provision herein or in any supplemental indenture
or to make any other provisions with respect to matters or questions arising under this Indenture
or in any supplemental indenture; provided, however, that such action shall not adversely affect
the interests of the Noteholders; or
(vi) to evidence and provide for the acceptance of the appointment hereunder by a successor trustee
with respect to the Notes and to add to or change any of the provisions of this Indenture as shall
be necessary to facilitate the administration of the trusts hereunder by more than one trustee,
pursuant to the requirements of Article VI hereof.
The Indenture Trustee is hereby authorized to join in the execution of any such supplemental
indenture and to make any further appropriate agreements and stipulations that may be therein
contained.
Section 9.02. Supplemental Indentures with Consent of Noteholders. The Issuer and the
Indenture Trustee, when authorized by an Issuer Order, also may, with the consent of the Majority
Noteholders, by an Act of Noteholders delivered to the Issuer and the Indenture Trustee, enter into
an indenture or indentures supplemental hereto for the purpose of adding any provisions to, or
changing in any manner or eliminating any of the provisions of, this Indenture or of modifying in
any manner the rights of any Noteholder under this Indenture; provided, however, that no such
supplemental indenture shall, without the consent of each Noteholder affected thereby:
(a) change the date of payment of any installment of principal of or interest on any Note, or
reduce the principal balance thereof, the interest rate thereon or the Termination Price with
respect thereto, change the provisions of this Indenture relating to the application of collections
on, or the proceeds of the sale of, the Collateral to payment of principal of or interest on the
Notes, or change any place of payment where, or the coin or currency in which, any Note or the
interest thereon is payable, or impair the right to institute suit for the enforcement of the
provisions of this Indenture requiring the application of funds available therefor, as provided in
Article V hereof, to the payment of any such amount due on the Notes on or after the
respective due dates thereof (or, in the case of redemption, on or after the Redemption Date);
(b) reduce the Percentage Interest, the consent of the Holders of which is required for any such
supplemental indenture, or the consent of the Holders of which is required for any waiver of
compliance with certain provisions of this Indenture or certain defaults hereunder and their
consequences provided for in this Indenture;
(c) modify or alter the provisions of the definition of the term “Outstanding” or “Percentage
Interest”
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(d) reduce the Percentage Interest of the Outstanding Notes, the consent of the Holders of
which is required to direct the Indenture Trustee to direct the Issuer to sell or liquidate the
Collateral pursuant to Section 5.04 hereof;
(e) modify any provision of this Section 9.02 except to increase any percentage specified
herein or to provide that certain additional provisions of this Indenture or the Basic Documents
cannot be modified or waived without the consent of the Holder of each Outstanding Note affected
thereby;
(f) modify any of the provisions of this Indenture in such manner as to affect the calculation of
the amount of any payment of interest or principal due on any Note on any Payment Date (including
the calculation of any of the individual components of such calculation). or to adversely affect
the rights of the Noteholders to the benefit of any provisions for the mandatory redemption of the
Notes contained herein; or
(g) permit the creation of any lien ranking prior to or on a parity with the lien of this Indenture
with respect to any part of the Collateral or, except as otherwise permitted or contemplated
herein, terminate the lien of this Indenture on any property at any time subject hereto or deprive
any Noteholder of the security provided by the lien of this Indenture.
The Indenture Trustee may in its discretion determine whether or not any Notes would be affected by
any supplemental indenture and any such determination shall be conclusive upon each Noteholder,
whether theretofore or thereafter authenticated and delivered hereunder. The Indenture Trustee
shall not be liable for any such determination made in good faith.
In connection with requesting the consent of the Noteholders pursuant to this Section 9.02,
the Indenture Trustee shall mail to the Noteholders to which such amendment or supplemental
indenture relates a notice prepared by the Issuer setting forth in general terms the substance of
such supplemental indenture. It shall not be necessary for any Act of Noteholders under this
Section 9.02 to approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act of Noteholders shall approve the substance thereof.
Section 9.03. Execution of Supplemental Indentures. In executing, or permitting the
additional trusts created by, any supplemental indenture permitted by this Article IX or
the modification thereby of the trusts created by this Indenture, the Indenture Trustee shall be
entitled to receive, and subject to Sections 6.01 and 6.02 hereof, shall be fully
protected in, relying upon, an Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or permitted by this Indenture. The Indenture Trustee may, but shall not be
obligated to, enter into any such supplemental indenture that affects the Indenture Trustee’s own
rights, duties, liabilities or immunities under this Indenture or otherwise.
Section 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental
indenture pursuant to the provisions hereof, this Indenture shall be and shall be deemed to be
modified and amended in accordance therewith with respect to the Notes affected thereby, and the
respective rights, limitations of rights, obligations, duties, liabilities and immunities under
this Indenture of the Indenture Trustee, the Issuer and the Noteholders shall thereafter be
determined, exercised and enforced hereunder subject in all respects to such modifications and
amendments, and all the terms and conditions of any such supplemental indenture shall be and be
deemed to be part of the terms and conditions of this Indenture for any and all purposes.
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Section 9.05. Reference in Notes to Supplemental Indentures. Notes authenticated and
delivered after the execution of any supplemental indenture pursuant to this Article IX
may, and if required by the Indenture Trustee shall, bear a notation in form approved by the
Indenture Trustee as to any matter provided for in such supplemental indenture. If the Issuer or
the Indenture Trustee shall so determine, new Notes so modified as to conform, in the opinion of
the Indenture Trustee and the Issuer, to any such supplemental indenture may be prepared and
executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for
Outstanding Notes.
ARTICLE X
REDEMPTION OF NOTES; PUT OPTION
Section 10.01. Redemption. The Servicer may, at its option, effect an early redemption of
the Notes on any Payment Date on or after the Clean-up Call Date. The Servicer shall effect such
early termination in the manner specified in and subject to the provisions of Section 10.02 of the
Sale and Servicing Agreement.
The Servicer shall furnish the Indenture Trustee with notice of any such redemption in order to
facilitate the Indenture Trustee’s compliance with its obligation to notify the Noteholders of such
redemption in accordance with Section 10.02 hereof.
Section 10.02. Form of Redemption Notice. Notice of redemption under Section 10.01 hereof
shall be by first-class mail, postage prepaid, or by facsimile mailed or transmitted not later than
10 days prior to the applicable Redemption Date to each Noteholder, as of the close of business on
the Record Date preceding the applicable Redemption Date, at such Noteholder’s address or facsimile
number appearing in the Note Register.
All notices of redemption shall state:
(i) the Redemption Date;
(ii) that on the Redemption Date Noteholders shall receive the Note Redemption Amount; and
(iii) the place where such Notes are to be surrendered for payment of the Termination Price (which
shall be the office or agency of the Issuer to be maintained as provided in Section 3.02
hereof).
Notice of redemption of the Notes shall be given by the Indenture Trustee in the name of the Issuer
and at the expense of the Servicer. Failure to give to any Noteholder notice of redemption, or any
defect therein, shall not impair or affect the validity of the redemption of any other Note.
Section 10.03. Notes Payable on Redemption Date. The Notes to be redeemed shall, following
notice of redemption as required by Section 10.02 hereof (in the case of redemption
pursuant to Section 10.01) hereof, on the Redemption Date become due and payable at the
Note Redemption Amount and (unless the Issuer shall default in the payment of the Note Redemption
Amount) no interest shall accrue thereon for any period after the date to which accrued interest is
calculated for purposes of calculating the Note Redemption Amount. The Issuer may not redeem the
Notes unless all outstanding obligations under the Notes have been paid in full.
40
Section 10.04. Put Option. The Majority Noteholders may, at their option, put all or
any portion of the Note Principal Balance of the Notes to the Issuer on any date upon giving notice
in the manner set forth in Section 10.05. On each Put Date, the Issuer shall purchase the Note
Principal Balance in the manner specified in and subject to the provisions of Section 10.04 of the
Sale and Servicing Agreement.
Section 10.05. Form of Put Option Notice. Notice of exercise of a Put Option under Section
10.04 hereof shall be given by the Majority Noteholders (including to the Indenture Trustee) by
first-class mail, postage prepaid, or by facsimile mailed or transmitted not later than 5 days
prior to the date on which the Notes shall be repurchased by the Issuer.
Section 10.06. Notes Payable on Put Date. The Note Principal Balance to be put to the
Issuer shall, following notice of the exercise of the Put Option as required by Section
10.05 hereof, on the Put Date become due and payable at the Note Redemption Amount and (unless
the Issuer shall default in the payment of the Note Redemption Amount) no interest shall accrue
thereon for any period after the date to which accrued interest is calculated for purposes of
calculating the Note Redemption Amount.
ARTICLE XI
MISCELLANEOUS
Section 11.01. Compliance Certificates and Opinions, etc. Upon any application or request
by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture
(except with respect to the Servicer’s servicing activity in the ordinary course of its business),
the Issuer shall furnish to the Indenture Trustee (i) an Officer’s Certificate stating that all
conditions precedent, if any, provided for in this Indenture relating to the proposed action have
been complied with and (ii) an Opinion of Counsel stating that in the opinion of such counsel all
such conditions precedent, if any, have been complied with.
Every certificate or opinion with respect to compliance with a condition or covenant provided for
in this Indenture shall include:
| (1) | a statement that each signatory of such certificate or opinion has read or has caused to be read such covenant or condition and the definitions herein relating thereto; | ||
| (2) | a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; | ||
| (3) | a statement that, in the opinion of each such signatory, such signatory has made such examination or investigation as is necessary to enable such signatory to express an informed opinion as to whether or not such covenant or condition has been complied with; and | ||
| (4) | a statement as to whether, in the opinion of each such signatory, such condition or covenant has been complied with. |
Section 11.02. Form of Documents Delivered to Indenture Trustee. In any case where several
matters are required to be certified by, or covered by an opinion of, any specified Person, it is
not necessary that all such matters be certified by, or covered by the opinion of, only one such
Person,
41
or that they be so certified or covered by only one document, but one such Person may certify
or give an opinion with respect to some matters and one or more other such Persons as to other
matters, and any such Person may certify or give an opinion as to such matters in one or several
documents.
Any certificate or opinion of an Authorized Officer of the Issuer may be based, insofar as it
relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless
such officer knows, or in the exercise of reasonable care should know, that the certificate or
opinion or representations with respect to the matters upon which such officer’s certificate or
opinion is based are erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel
may be based, insofar as it relates to factual matters,
upon a certificate or opinion of, or representations by, an officer or officers of the Servicer,
the Loan Originator, the Issuer or the Administrator, stating that the information with respect to
such factual matters is in the possession of the Servicer, the Loan Originator, the Issuer or the
Administrator, unless such counsel knows, or in the exercise of reasonable care should know, that
the certificate or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more applications, requests, consents,
certificates, statements, opinions or other instruments under this Indenture, they may, but need
not, be consolidated and form one instrument.
Whenever in this Indenture, in connection with any application or certificate or report to the
Indenture Trustee, it is provided that the Issuer shall deliver any document as a condition of the
granting of such application, or as evidence of the Issuer’s compliance with any term hereof, it is
intended that the truth and accuracy, at the time of the granting of such application or at the
effective date of such certificate or report (as the case may be), of the facts and opinions stated
in such document shall in such case be conditions precedent to the right of the Issuer to have such
application granted or to the sufficiency of such certificate or report. The foregoing shall not,
however, be construed to affect the Indenture Trustee’s right to rely upon the truth and accuracy
of any statement or opinion contained in any such document as provided in Article VI,
hereof.
Section 11.03. Acts of Noteholders. (a) Any request, demand, authorization, direction,
notice, consent, waiver or other action provided by this Indenture to be given or taken by
Noteholders may be embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Noteholders in person or by agents duly appointed in writing; and except as
herein otherwise expressly provided, such action shall become effective when such instrument or
instruments are delivered to the Indenture Trustee, and, where it is hereby expressly required, to
the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby)
are herein sometimes referred to as the “Act of Noteholders” signing such instrument or
instruments. Proof of execution of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and (subject to Section 6.01 hereof)
conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this
Section 11.03.
(b) The fact and date of the execution by any Person of any such instrument or writing may be
proved in any manner that the Indenture Trustee deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver or other action by any
Noteholder shall bind the Holder of every Note issued upon the registration thereof or in exchange
therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the
Indenture Trustee or the Issuer in reliance thereon, whether or not notation of such action is made
upon such Note.
42
Section 11.04. Notices, etc., to Indenture Trustee and Issuer. Any request, demand,
authorization, direction, notice, consent, waiver or Act of Noteholders or other documents provided
or permitted by this Indenture shall be in writing and if such request, demand, authorization,
direction, notice, consent, waiver or Act of Noteholders is to be made upon, given or furnished to
or filed with:
(i) the Indenture Trustee by any Noteholder or by the Issuer shall be sufficient for every purpose
hereunder, if made, given, furnished or filed in writing (including by facsimile) to or with the
Indenture Trustee at P.O Box 98, Columbia, Maryland 21046, Attention: Option One Owner Trust
2005-9, with a copy to it at its Corporate Trust Office, or
(ii) the Issuer by the Indenture Trustee or by any Noteholder shall be sufficient for every purpose
hereunder if in writing and made, given, furnished, filed or transmitted via facsimile to the
Issuer at: Option One Owner Trust 2005-9, c/o Wilmington Trust Company as Owner Trustee, One Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust
Department, telephone number: (302) 636-1000, telecopy number: (302) 636-4144, or at any other
address or facsimile number previously furnished in writing to the Indenture Trustee by the Issuer
or the Administrator. The Issuer shall promptly transmit any notice received by it from the
Noteholders to the Indenture Trustee.
Section 11.05. Notices to Noteholders, Waiver. Where this Indenture provides for notice to
Noteholders of any event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class, postage prepaid to each Noteholder
affected by such event, at his address as it appears on the Note Register, not later than the
latest date, and not earlier than
the earliest date, prescribed for the giving of such notice. In any case where notice to
Noteholders is given by mail, neither the failure to mail such notice nor any defect in any notice
so mailed to any particular Noteholder shall affect the sufficiency of such notice with respect to
other Noteholders, and any notice that is mailed in the manner herein provided shall conclusively
be presumed to have duly been given.
Where this Indenture provides for notice in any manner, such notice may be waived in writing by any
Person entitled to receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Noteholders shall be filed with the Indenture
Trustee but such filing shall not be a condition precedent to the validity of any action taken in
reliance upon such a waiver.
In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage
or similar activity, it shall be impractical to mail notice of any event to Noteholders when such
notice is required to be given pursuant to any provision of this Indenture, then any manner of
giving such notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a
sufficient giving of such notice.
Section 11.06. Effect of Headings and Table of Contents. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect the construction
hereof.
Section 11.07. Successors and Assigns. All covenants and agreements in this Indenture and
the Notes by the Issuer shall bind its successors and assigns, whether so expressed or not. All
agreements of the Indenture Trustee in this Indenture shall bind its successors, co-trustees and
agents.
43
Section 11.08. Separability. In case any provision in this Indenture or in the Notes
shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
Section 11.09. Benefits of Indenture. Nothing in this Indenture or in the Notes, express or
implied, shall give to any Person, other than the parties hereto and their successors hereunder,
and the Noteholders and the Noteholder Agent, and any other party secured hereunder, and any other
Person with an ownership interest in any part of the Collateral, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
Section 11.10. Legal Holidays. In any case where the date on which any payment is due shall
not be a Business Day, then (notwithstanding any other provision of the Notes or this Indenture)
payment need not be made on such date, but may be made on the next succeeding Business Day with the
same force and effect as if made on the date on which nominally due, and no interest shall accrue
for the period from and after any such nominal date.
Section 11.11. GOVERNING LAW. THIS INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS (OTHER THAN SECTION
5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW), AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 11.12. Counterparts. This Indenture may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
Section 11.13. Recording of Indenture. If this Indenture is subject to recording in any
appropriate public recording offices, such recording is to be effected by the Issuer and at its
expense accompanied by an Opinion of Counsel (which may be counsel to the Indenture Trustee or any
other counsel reasonably acceptable to the Indenture Trustee; provided, however, that the expense
of such Opinion of Counsel shall in no event be an expense of the Indenture Trustee) to the effect
that such recording is necessary either for the protection of the Noteholders or any other Person
secured hereunder or for the enforcement of any right or remedy granted to the Indenture Trustee
under this Indenture.
Section 11.14. Trust Obligation. No recourse may be taken, directly or indirectly, with
respect to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on the Notes
or, except as expressly provided for in Article VI hereof, under this Indenture or
any certificate or other writing delivered in connection herewith or therewith, against (i) the
Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial
interest in the Issuer or (iii) any partner, owner, beneficiary, agent, officer, director,
employee, agent or “control person” within the meaning of the Securities Act and the Exchange Act,
of the Indenture Trustee or the Owner Trustee in its individual capacity, any holder of a
beneficial interest in the Issuer, the Owner Trustee or the Indenture Trustee or of any successor
or assign of the Indenture Trustee or the Owner Trustee in its individual capacity, except as any
such Person may expressly have agreed (it being understood that the Indenture Trustee and the Owner
Trustee have no such obligations in their individual capacity) and except that any such partner,
owner or beneficiary of the Issuer shall be fully liable, to the extent provided by applicable law,
for any unpaid consideration for stock, unpaid capital contribution or failure to pay any
installment or call owing to such entity. For all purposes of this Indenture, in the performance of
any duties or obligations of the Issuer hereunder, the Owner Trustee shall be subject to, and
entitled to the benefits of, the terms and provisions of Articles VI, VII and VIII of the Trust
Agreement.
44
Section 11.15. No Petition. The Indenture Trustee, by entering into this Indenture,
and each Noteholder, by accepting a Note, hereby covenant and agree that they will not at any time
institute against the Depositor or the Issuer, or join in any institution against the Depositor or
the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings,
or other proceedings under any United States federal or state bankruptcy or similar law, in
connection with any obligations relating to the Notes, this Indenture or any of the Basic
Documents.
Section 11.16. Inspection. The Issuer agrees that, on reasonable prior notice, it will
permit any representative of the Indenture Trustee, during the Issuer’s normal business hours, to
examine all the books of account, records, reports and other papers of the Issuer, to make copies
and extracts therefrom, to cause such books to be audited by Independent certified public
accountants, and to discuss the Issuer’s affairs, finances and accounts with the Issuer’s officers,
employees, and Independent certified public accountants, all at such reasonable times and as often
as may reasonably be requested and at the expense of the Servicer. The Indenture Trustee shall and
shall cause its representatives to hold in confidence all such information except to the extent
disclosure may be required by law (and all reasonable applications for confidential treatment are
unavailing) and except to the extent that the Indenture Trustee may reasonably determine that such
disclosure is consistent with its obligations hereunder.
Section 11.17. Third Party Beneficiary. The Noteholders and the Noteholder Agent are
intended third party beneficiaries of this Indenture and shall be entitled to rely upon and
directly enforce the provisions of this Indenture as if parties hereto.
Section 11.18. Limitation on Liability. It is expressly understood and agreed by the
parties hereto that (a) this Indenture is executed and delivered by Wilmington Trust Company, not
individually or personally, but solely as Owner Trustee of Option One Owner Trust 2005-9, in the
exercise of the powers and authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Issuer is made and intended not as
personal representations, undertakings and agreements by Wilmington Trust Company but is made and
intended for the purpose for binding only the Issuer, (c) nothing herein contained shall be
construed as creating any liability on Wilmington Trust Company, individually or personally, to
perform any covenant either expressed or implied contained herein, all such liability, if any,
being expressly waived by the parties hereto and by any Person claiming by, through or under the
parties hereto and (d) under no circumstances shall Wilmington Trust Company be personally liable
for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or
failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer
under this Indenture or any other related documents.
45
IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused this Indenture to be duly
executed by their respective officers, thereunto duly authorized and duly attested, all as of the
day and year first above written.
| OPTION ONE OWNER TRUST 2005-9, | ||||||
| By: | Wilmington Trust Company not in its individual capacity but solely as Owner Trustee |
|||||
| By: | /s/
|
|||||
| Name: Joann A. Rozell | ||||||
| Title: Assistant Vice President | ||||||
| WELLS FARGO BANK, N.A., | ||||||
| as Indenture Trustee | ||||||
| By: | /s/
|
|||||
| Name: Darron C. Woodus | ||||||
| Title: Assistant Vice President | ||||||
Indenture
STATE OF DELAWARE
|
) | |||||||||
| ) | ss.: | |||||||||
COUNTY OF NEWCASTLE
|
) |
BEFORE ME, the undersigned authority, a Notary Public in and for said county and state, on this day
personally appeared Joann A. Rodell
, known to me to be the person and officer whose name is
subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said
Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity, but
solely as Owner Trustee on behalf of OPTION ONE OWNER-TRUST 2005-9, a Delaware statutory trust, and
that such person executed the same as the act of said statutory trust for the purpose and
consideration therein expressed, and in the capacities therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this___23___ day of _December___, 2005.
| /s/ | ||||
| Notary Public | ||||
| Janel R. Havrilla | ||||
| Notary Public – State of Delaware | ||||
| My Comm. Expires Feb. 2, 2009 | ||||
(Seal)
My commission expires:
STATE OF MARYLAND
|
) | |||||||||
| ) | ss.: | |||||||||
COUNTY OF ANN ARUNDEL
|
) |
BEFORE ME, the undersigned authority, a Notary Public in and for said county and state, on this day
personally appeared Darron C. Woodus, known to me to be the person and officer whose name is
subscribed to the foregoing instrument and acknowledged to me that the same was the act of WELLS
FARGO BANK, N.A., and that such person executed the same as the act of said corporation for the
purpose and consideration therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 29th day of December, 2005.
| /s/ | ||||
| Notary Public |
(Seal)
Joanne K Stahling
My commission expires 10/14/2009
2
EXHIBIT A
FORM OF NOTES
THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE LESS THAN THE MAXIMUM NOTE
PRINCIPAL BALANCE SHOWN ON THE FACE HEREOF. ANY PURCHASER OF THIS NOTE MAY ASCERTAIN THE
OUTSTANDING PRINCIPAL AMOUNT HEREOF BY INQUIRY OF THE INDENTURE TRUSTEE.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR
ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF SUCH REGISTRATION, UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH
NOTE ONLY (A) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE 1933
ACT, (B) FOR SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE 1933 ACT,
TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A
UNDER THE 1933 ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A OR (C) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (A)(1),
(2),(3) OR (7) OF RULE 501 UNDER THE 1933 ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT, OR
FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL “ACCREDITED INVESTOR,” FOR INVESTMENT PURPOSES AND NOT
WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE 1933
ACT, IN EACH CASE IN COMPLIANCE WITH THE REQUIREMENTS OF THE INDENTURE AND APPLICABLE STATE
SECURITIES LAWS.
THIS NOTE MAY NOT BE TRANSFERRED UNLESS THE INDENTURE TRUSTEE HAS RECEIVED A CERTIFICATE FROM THE
TRANSFEREE TO THE EFFECT THAT EITHER (I) THE TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN OR OTHER
RETIREMENT PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF
1974, AS AMENDED, OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (EACH, A
“PLAN”), AND IS NOT ACTING ON BEHALF OF OR INVESTING THE ASSETS OF A PLAN OR (II) IF THE TRANSFEREE
IS A PLAN OR IS ACTING ON BEHALF OF OR INVESTING THE ASSETS OF A PLAN, EITHER THAT NO PROHIBITED
TRANSACTION WITHIN THE MEANING OF SECTION 406(a) OF ERISA OR SECTION 4975 OF THE CODE WOULD OCCUR
UPON THE TRANSFER OF THE NOTE OR THAT THE CONDITIONS FOR EXEMPTIVE RELIEF UNDER A PROHIBITED
TRANSACTION EXEMPTION HAS BEEN SATISFIED INCLUDING BUT NOT LIMITED TO, PROHIBITED TRANSACTION CLASS
EXEMPTION (“PTCE”) 96-23 (RELATING TO TRANSACTIONS EFFECTED BY AN “IN-HOUSE ASSET MANAGER”), PTCE
95-60 (RELATING TO TRANSACTIONS INVOLVING INSURANCE COMPANY GENERAL ACCOUNTS), PTCE 91-38 (RELATING
TO TRANSACTIONS INVOLVING BANK COLLECTIVE INVESTMENT FUNDS), PTCE 90-1 (RELATING TO TRANSACTIONS
INVOLVING INSURANCE COMPANY POOLED SEPARATE ACCOUNTS) AND PTCE 84-14
A-1
(RELATING TO TRANSACTIONS EFFECTED BY A “QUALIFIED PROFESSIONAL ASSET MANAGER”).
A-2
Maximum Note Principal Balance: $
Initial Percentage Interest: ___%
No. ___
Initial Percentage Interest: ___%
No. ___
OPTION ONE OWNER TRUST 2005-9
MORTGAGE-BACKED NOTES
OPTION ONE OWNER TRUST 2005-9, a Delaware statutory trust (the “Issuer”), for value
received, hereby promises to pay to , or registered assigns (the
“Noteholder”), the principal sum of ($ ) or so much
thereof as may be advanced and outstanding hereunder and to pay interest on such principal sum or
such part thereof as shall remain unpaid from time to time, at the rate and at the times provided
in the Sale and Servicing Agreement and the Indenture. Principal of this Note is payable on each
Payment Date in an amount equal to the result obtained by multiplying (i) the Percentage Interest
of this Note by (ii) the principal amount distributed in respect of such Payment Date.
The Outstanding Note Principal Balance of this Note bears interest at the Note Interest Rate. On
each Payment Date amounts in respect of interest on this Note will be paid in an amount equal to
the result obtained by multiplying (i) the Percentage Interest of this Note by (ii) the aggregate
amount paid in respect of interest on the Notes with respect to such Payment Date.
Capitalized terms used but not defined herein have the meanings set forth in the Indenture (the
“Indenture”), dated as of December 30, 2005, between the Issuer and Wells Fargo Bank, N.A.,
as Indenture Trustee (the “Indenture Trustee”) or, if not defined therein, the Sale and
Servicing Agreement (the “Sale and Servicing Agreement”), dated as of December 30, 2005,
among the Issuer, the Depositor, the Servicer, the Loan Originator and the Indenture Trustee on
behalf of the Noteholders.
By its acceptance of this Note, each Noteholder covenants and agrees, until the earlier of (a) the
termination of the Revolving Period and (b) the Maturity Date, on each Transfer Date to advance
amounts in respect of Additional Note Principal Balance hereunder to the Issuer, subject to and in
accordance with the terms of the Indenture, the Sale and Servicing Agreement and the Note Purchase
Agreement.
In the event of an advance of Additional Note Principal Balance by the Noteholders as provided in
Section 2.01(c) of the Sale and Servicing Agreement, each Noteholder shall, and is hereby
authorized to, record on the schedule attached to its Note the date and amount of any Additional
Note Principal Balance advanced by it, and each repayment thereof; provided that failure to make
any such recordation on such schedule or any error in such schedule shall not adversely affect any
Noteholder’s rights with respect to its Additional Note Principal Balance and its right to receive
interest payments in respect of the Additional Note Principal Balance held by such Noteholder.
Absent manifest error, the Note Principal Balance of each Note as set forth in the notations made
by the related Noteholder on such Note shall be binding upon the Indenture Trustee and the Issuer;
provided that failure by a Noteholder to make such recordation on its Note or any error in such
notation shall not adversely affect any Noteholder’s rights with respect to its Note Principal
Balance and its right to receive principal and interest payments in respect thereof.
The Servicer may, at its option, effect an early redemption of the Notes for an amount equal to the
Note Redemption Amount on any Payment Date on or after the Clean-up Call Date. The
A-3
Servicer shall effect such early termination by providing notice thereof to the Indenture
Trustee and Owner Trustee and by purchasing all of the Loans at a purchase price, payable in cash,
equal to the Termination Price.
Reference is hereby made to the further provisions of this Note set forth on the reverse hereof,
which further provisions shall for all purposes have the same effect as if set forth at this place.
The statements in the legend set forth above are an integral part of the terms of this Note and by
acceptance hereof each Holder of this Note agrees to be subject to and bound by the terms and
provisions set forth in such legend.
Unless the Certificate of authentication hereon shall have been executed by an authorized officer
of the Indenture Trustee, by manual signature, this Note shall not entitle the Noteholder hereof to
any benefit under the Indenture or the Sale and Servicing Agreement and/or be valid for any
purpose.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK AND WITHOUT GIVING EFFECT
TO THE CONFLICT OF LAW PROVISIONS THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL
OBLIGATIONS LAW).
IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed, manually or in facsimile,
by its Authorized Officer, as of the date set forth below.
Date: , 200__
| OPTION ONE OWNER TRUST 2005-9, | ||||||
| By: | Wilmington Trust Company not in its individual capacity but solely as Owner Trustee under the Trust Agreement | |||||
| By: | ||||||
INDENTURE TRUSTEE’S CERTIFICATE OF AUTHENTICATION
This is one of the Notes designated above and referred to in the within-mentioned Indenture.
Date: , 200__
| WELLS FARGO BANK, N.A., not in its individual capacity but solely as Indenture Trustee | ||||||
| By: | ||||||
A-4
[Reverse of Note]
This Note is one of the duly authorized Notes of the Issuer, designated as its Mortgage-Backed
Notes (herein called the “Notes”), all issued under the Indenture. Reference is hereby made
to the Indenture and all indentures supplemental thereto, and the Sale and Servicing Agreement for
a statement of the respective rights and obligations thereunder of the Issuer, the Indenture
Trustee and the Noteholders. To the extent that any provision of this Note contradicts or is
inconsistent with the provisions of the Indenture or the Sale and Servicing Agreement, the
provisions of the Indenture or the Sale and Servicing Agreement, as applicable, shall control and
supersede such contradictory or inconsistent provision herein. The Notes are subject to all terms
of the Indenture and the Sale and Servicing Agreement.
The principal of and interest on this Note are payable in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of public and private
debts. All payments made by the Issuer with respect to this Note shall be applied in accordance
with the Indenture and the Sale and Servicing Agreement.
The entire unpaid principal amount of this Note shall be due and payable on the earlier of the
Maturity Date, the Redemption Date and the Final Put Date, if any, pursuant to Article X of
the Sale and Servicing Agreement and the Indenture. Notwithstanding the foregoing, the entire
unpaid principal amount of the Notes shall be due and payable on the date on which an Event of
Default shall have occurred and be continuing and the Indenture Trustee, at the direction or upon
the prior written consent of the Majority Noteholders, has declared the Notes to be immediately due
and payable in the manner provided in Section 5.02 of the Indenture. All principal payments
on the Notes shall be made pro rata to the Noteholders entitled thereto.
The Collateral secures this Note and all other Notes equally and ratably without prejudice,
priority or distinction between any Note and any other Note. The Notes are non-recourse obligations
of the Issuer and are limited in right of payment to amounts available from the Collateral, as
provided in the Indenture. The Issuer shall not otherwise be liable for payments on the Notes, and
none of the owners, agents, officers, directors, employees, or successors or assigns of the Issuer
shall be personally liable for any amounts payable, or performance due, under the Notes or the
Indenture.
Any installment of interest or principal on this Note shall be paid on the applicable Payment Date
to the Person in whose name this Note (or one or more Predecessor Notes) is registered in the Note
Register as of the close of business on the related Record Date by wire transfer in immediately
available funds to the account specified in writing by the related Noteholder to the extent
provided by the Indenture and otherwise by check mailed to the Noteholder.
Any reduction in the principal amount of this Note (or any one or more Predecessor Notes) effected
by any payments made on any Payment Date shall be binding upon all future Holders of this Note and
of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not noted hereon. Any increase in the principal amount of this Note (or any one
or more Predecessor Notes) effected by payments to the Issuer of Additional Note Principal Balances
shall be binding upon the Issuer and shall inure to the benefit of all future Holders of this Note
and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not noted hereon.
As provided in the Indenture and subject to certain limitations set forth therein, the transfer of
this Note may be registered on the Note Register upon surrender of this Note for registration of
transfer at the office or agency designated by the Issuer pursuant to the Indenture, duly endorsed
by, or
A-5
accompanied by a written instrument of transfer in the form attached hereto duly executed by,
the Holder hereof or such Holder’s attorney duly authorized in writing, with such signature
guaranteed by an “eligible guarantor institution” meeting the requirements of the Securities
Transfer Agent’s Medallion Program (“STAMP”), and thereupon one or more new Notes of authorized
denominations and in the same aggregate principal amount will be issued to the designated
transferee or transferees. No service charge will be charged for any registration of transfer or
exchange of this Note, but the Issuer may require the Noteholder to pay a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection with any such registration
of transfer or exchange.
Each Noteholder, by acceptance of a Note or a beneficial interest in a Note, covenants and agrees
that no recourse may be taken, directly or indirectly, with respect to the obligations of the
Issuer, the Owner Trustee or the Indenture Trustee on the Notes or under the Indenture or any
certificate or other writing delivered in connection therewith, against (i) the Indenture Trustee
or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the
Issuer or (iii) any partner, owner, beneficiary, agent, officer, director, employee or “control
person” within the meaning of the 1933 Act and the Exchange Act of the Indenture Trustee or the
Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the
Owner Trustee or the Indenture Trustee or of any successor or assign of the Indenture Trustee or
the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed
and except that any such partner, owner or beneficiary shall be fully liable, to the extent
provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or
failure to pay any installment or call owing to such entity.
Each Noteholder, by acceptance of a Note or a beneficial interest in a Note, covenants and agrees
by accepting the benefits of the Indenture that such Noteholder will not at any time institute
against the Issuer, or join in any institution against the Issuer of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings under any United States federal
or state bankruptcy or similar law in connection with any obligations relating to the Notes or the
Basic Documents.
The Issuer has entered into the Indenture and this Note is issued with the intention that, for
federal, state and local income, single business and franchise tax purposes, the Notes will qualify
as indebtedness of the Issuer secured by the Collateral. Each Noteholder, by acceptance of a Note,
agrees to treat the Notes for federal, state and local income, single business and franchise tax
purposes as indebtedness of the Issuer. Each Noteholder, by its acceptance of a Note, represents
and warrants that the number of ICA Owners with respect to all of its Notes shall not exceed four.
Prior to the due presentment for registration of transfer of this Note, the Issuer, the Indenture
Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name
this Note (as of the day of determination or as of such other date as may be specified in the
Indenture) is registered as the owner hereof for all purposes, whether or not this Note be overdue,
and none of the Issuer, the Indenture Trustee or any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the
modification of the rights and obligations of the Issuer and the rights of the Noteholders under
the Indenture at any time by the Issuer with the consent of the Majority Noteholders. The Indenture
also contains provisions permitting the Holders of Notes representing specified Percentage
Interests of the Outstanding Notes, on behalf of all of the Noteholders, to waive compliance by the
Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the Holder of this Note (or any one or more
Predecessor Notes) shall be conclusive and binding upon such Holder and upon all future Holders of
this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or
in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The
Indenture also permits the Indenture Trustee to
A-6
amend or waive certain terms and conditions set forth in the Indenture without the consent of
any Noteholder.
The term “Issuer” as used in this Note includes any successor to the Issuer under the
Indenture.
The Notes are issuable only in registered form in denominations as provided in the Indenture,
subject to certain limitations therein set forth.
No reference herein to the Indenture and no provision of this Note or of the Indenture shall
alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the
principal of and interest on this Note at the times, place and rate, and in the coin or currency
herein prescribed.
Anything herein to the contrary notwithstanding, except as expressly provided in the Basic
Documents, none of the Issuer in its individual capacity, the Owner Trustee in its individual
capacity, any owner of a beneficial interest in the Issuer, or any of their respective partners,
beneficiaries, agents, officers, directors, employees or successors or assigns shall be personally
liable for, nor shall recourse be had to any of them for, the payment of principal of or interest
on this Note or performance of, or omission to perform, any of the covenants, obligations or
indemnifications contained in the Indenture. The Holder of this Note by its acceptance hereof
agrees that, except as expressly provided in the Basic Documents, in the case of an Event of
Default under the Indenture, the Holder shall have no claim against any of the foregoing for any
deficiency, loss or claim therefrom; provided, however, that nothing contained herein shall be
taken to prevent recourse to, and enforcement against, the assets of the Issuer for any and all
liabilities, obligations and undertakings contained in the Indenture or in this Note.
A-7
ASSIGNMENT
Social Security or taxpayer I.D. or other identifying number of assignee:
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto:
;
(name and address of assignee)
the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints,
attorney, to transfer said Note on
the books kept for registration thereof, with full power of
substitution in the premises.
Dated: |
||||||||||
| */ | ||||||||||
| Signature Guaranteed: | ||||||||||
| */ | ||||||||||
| */ | NOTICE: The signature to this assignment must correspond with the name of the registered owner as it appears on the face of the within Note in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by an “eligible guarantor institution” meeting the requirements of STAMP. |
A-8
Schedule to Note
dated as of , 200__
of OPTION ONE OWNER TRUST 2005-9
dated as of , 200__
of OPTION ONE OWNER TRUST 2005-9
| Date of advance of | Amount of advance | |||||||||||||||
| Additional Note | of Additional Note | Aggregate Note | Note Principal | |||||||||||||
| Principal Balance | Principal Balance | Percentage Interest | Principal Balance | Balance of Note | ||||||||||||
| 100% | ||||||||||||||||
A-9
EXHIBIT B-1
FORM OF RULE 144A TRANSFEROR CERTIFICATE
Wells Fargo Bank, N.A.
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
Attention: Corporate Trust Services – Option One Owner Trust 2005-9
Re: Option One Owner Trust 2005-9
Reference is hereby made to the Indenture dated as of December 30, 2005, (the “Indenture”)
between Option One Owner Trust 2005-9 (the “Trust”) and Wells Fargo Bank, N.A. (the “Indenture
Trustee”). Capitalized terms used but not defined herein shall have the meanings given to them in
the Sale and Servicing Agreement dated as of December 30, 2005, among the Trust, Option One Loan
Warehouse Corporation (the “Depositor”), Option One Mortgage Corporation (the “Servicer” and the
“Loan Originator”) and the Indenture Trustee.
The
undersigned (the “Transferor”) has requested a
transfer of $ _________ current principal
balance Notes to [insert name of transferee].
In connection with such request, and in respect of such Notes, the Transferor hereby certifies
that such Notes are being transferred in accordance with (i) the transfer restrictions set forth in
the Indenture and the Notes and (ii) Rule 144A under the Securities Act of 1933, as amended to a
purchaser that the Transferor reasonably believes is a “qualified institutional buyer” within the
meaning of Rule 144A purchasing for its own account or for the account of a “qualified
institutional buyer,” which purchaser is aware that the sale to it is being made in reliance upon
Rule 144A, in a transaction meeting the requirements of Rule 144A and in accordance with any
applicable securities laws of any state of the United States or any other applicable jurisdiction.
This certificate and the statements contained herein are made for your benefit and the benefit
of the Depositor.
| [Name of Transferor] | ||||||||||
| By: | ||||||||||
| Name: | ||||||||||
| Title: | ||||||||||
Dated: |
, ____ | |||||||||
B-1-1
EXHIBIT B-2
FORM OF TRANSFEREE CERTIFICATE FOR
INSTITUTIONAL ACCREDITED INVESTOR
INSTITUTIONAL ACCREDITED INVESTOR
Wells Fargo Bank, N.A.
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
Attention: Corporate Trust Services — Option One Owner Trust 2005-9
Re: Option One Owner Trust 2005-9
In connection with our proposed purchase of $ Note Principal Balance
Mortgage-Backed Notes (the “Offered Notes”) issued by Option One Owner Trust 2005-9, we confirm
that:
| (1) | We understand that the Offered Notes have not been, and will not be, registered under the Securities Act of 1933, as amended (the “1933 Act”) or any state securities laws, and may not be sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Offered Notes we will do so only (A) pursuant to a registration statement which has been declared effective under the 1933 Act, (B) for so long as the Offered Notes are eligible for resale pursuant to Rule 144A under the 1933 Act, to a Person we reasonably believe is a “qualified institutional buyer” as defined in Rule 144A that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the transfer is being made in reliance on Rule 144A, or (C) to an institutional “accredited investor” within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the 1933 Act (an “Institutional Accredited Investor”) that is acquiring the Offered Notes for its own account, or for the account of such an Institutional Accredited Investor, for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the 1933 Act, in each case in compliance with the requirements of the Indenture dated as of December 30, 2005, between Option One Owner Trust 2005-9 and Wells Fargo Bank, N.A., as Indenture Trustee, and applicable state securities laws; and we further agree, in the capacities stated above, to provide to any person purchasing any of the Offered Notes from us a notice advising such purchaser that resales of the Offered Notes are restricted as stated herein. | |
| (2) | We understand that, in connection with any proposed resale of any Offered Notes to an Institutional Accredited Investor, we will be required to furnish to the Indenture Trustee and the Depositor a certification from such transferee as provided in Section 2.12 of the Indenture to confirm that the proposed sale is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the 1933 Act and applicable state securities laws. We further understand that the Offered Notes purchased by us will bear a legend to the foregoing effect. | |
| (3) | We are acquiring the Offered Notes for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the 1933 Act. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Offered Notes, and we and any account for which we are acting are each able to bear the economic risk of such investment. |
B-2-1
| (4) | We are an Institutional Accredited Investor and we are acquiring the Offered Notes purchased by us for our own account or for one or more accounts (each of which is an Institutional Accredited Investor) as to each of which we exercise sole investment discretion. | |
| (5) | We have received such information as we deem necessary in order to make our investment decision. | |
| (6) | We either (i) are not, and are not acquiring the Offered Notes on behalf of or with the assets of, an employee benefit plan or other retirement plan or arrangement subject to Title I of ERISA or Section 4975 of the Code, or (ii) are, or are acquiring the Offered Notes on behalf of or with the assets of, an employee benefit plan or other retirement plan or arrangement subject to Title I of ERISA of Section 4975 of the Code and either no prohibited transaction within the meaning of Section 406(a) of ERISA or Section 4975 of the Code will occur upon the transfer of the Note or the conditions for exemptive relief under a prohibited transaction exemption has been satisfied, including but not limited to, Prohibited Transaction Class Exemption (“PTCE”) 96-23 (relating to transactions effected by an “in-house asset manager”), PTCE 95-60 (relating to transactions involving insurance company general accounts), PTCE 91-38 (relating to transactions involving bank collective investment funds), PTCE 90-1 (relating to transactions involving insurance company pooled separate accounts), and PTCE 84-14 (relating to transactions effected by a “qualified professional asset manager”).Terms used in this letter which are not otherwise defined herein have the respective meanings assigned thereto in the Indenture. |
You and the Depositor are entitled to rely upon this letter and are irrevocably authorized to
produce this letter or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
| [Name of Transferor] | ||||||||||
| By: | ||||||||||
| Name: | ||||||||||
| Title: | ||||||||||
Dated: |
, ____ | |||||||||
B-2-2
EXHIBIT B-3
[FORM OF RULE 144A TRANSFEREE CERTIFICATE]
Wells Fargo Bank, N.A.
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
Attention: Corporate Trust Services — Option One Owner Trust 2005-9
Re: Option One Owner Trust 2005-9
1. The undersigned is the of (the
“Investor”), a [corporation duly organized] and existing under the laws of
on behalf of which he makes this affidavit.
2. The Investor either (i) is not, and is not acquiring the Option One Owner Trust
2005-9 Notes (the “Offered Notes”) on behalf of or with the assets of, an employee benefit plan or
other retirement plan or arrangement subject to Title I of ERISA or Section 4975 of the Code, or
(ii) is, or is acquiring the Offered Notes on behalf of or with the assets of, an employee benefit
plan or other retirement plan or arrangement subject to Title I of ERISA of Section 4975 of the
Code and either no prohibited transaction within the meaning of Section 406(a) of ERISA or Section
4975 of the Code would occur upon the transfer of the Note or the conditions for exemptive relief
under a prohibited transaction exemption has been satisfied, including but not limited to,
Prohibited Transaction Class Exemption (“PTCE”) 96-23 (relating to transactions effected by an
“in-house asset manager”), PTCE 95-60 (relating to transactions involving insurance company general
accounts), PTCE 91-38 (relating to transactions involving bank collective investment funds), PTCE
90-1 (relating to transactions involving insurance company pooled separate accounts), and PTCE
84-14 (relating to transactions effected by a “qualified professional asset manager”).
3. The Investor understands that the Offered Notes have not been, and will not be,
registered under the Securities Act of 1933, as amended (the “1933 Act”) or any state securities
laws, and may not be sold except as permitted in the following sentence. The Investor agrees, on
its own behalf and on behalf of any accounts for which it is acting as hereinafter stated, that if
it should sell any Offered Notes it will do so only (A) pursuant to a registration statement which
has been declared effective under the 1933 Act, (B) for so long as the Offered Notes are eligible
for resale pursuant to Rule 144A under the 1933 Act, to a Person it reasonably believes is a
“qualified institutional buyer” as defined in Rule 144A that purchases for its own account or for
the account of a qualified institutional buyer to whom notice is given that the transfer is being
made in reliance on Rule 144A, (C) to an institutional “accredited investor” within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the 1933 Act (an “Institutional Accredited
Investor”) that is acquiring the Offered Notes for its own account, or for the account of such an
Institutional Accredited Investor, for investment purposes and not with a view to, or for offer or
sale in connection with, any distribution in violation of the 1933 Act, in each case in compliance
with the requirements of the Indenture dated as of December 30, 2005, between Option One Owner
Trust 2005-9 and Wells Fargo Bank, N.A., as Indenture Trustee, and applicable state securities
laws; and the Investor further agrees, in the capacities stated above, to provide to any person
purchasing any of the Offered Notes from it a notice advising such purchaser that resales of the
Offered Notes are restricted as stated herein.
B-3-1
[FOR TRANSFERS IN RELIANCE UPON RULE 144A]
4. The Investor is a “qualified institutional buyer” (as such term is defined under
Rule 144A under the Securities Act of 1933, as amended (the “1933 Act”), and is acquiring the
Offered Notes for its own account or as a fiduciary or agent for others (which others also are
“qualified institutional buyers”). The Investor is familiar with Rule 144A under the 1933 Act, and
is aware that the transferor of the Offered Notes and other parties intend to rely on the
statements made herein and the exemption from the registration requirements of the 1933 ‘Act
provided by Rule 144A.
| [Name of Transferor] | ||||||||||
| By: | ||||||||||
| Name: | ||||||||||
| Title: | ||||||||||
Dated: |
, ____ | |||||||||
B-3-2
EXHIBIT C
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR
ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF SUCH REGISTRATION, UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH
NOTE ONLY (A) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE 1933
ACT, (B) FOR SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE 1933 ACT,
TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A
UNDER THE 1933 ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A OR (C) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF
SUBPARAGRAPH (A)(1), (2),(3) OR (7) OF RULE 501 UNDER THE 1933 ACT THAT IS ACQUIRING THE NOTE FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL “ACCREDITED INVESTOR” FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN
VIOLATION OF THE 1933 ACT, IN EACH CASE IN COMPLIANCE WITH THE REQUIREMENTS OF THE INDENTURE AND
APPLICABLE STATE SECURITIES LAWS.
THIS NOTE MAY NOT BE TRANSFERRED UNLESS THE INDENTURE TRUSTEE HAS RECEIVED A CERTIFICATE FROM THE
TRANSFEREE TO THE EFFECT THAT EITHER (I) THE TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT PLAN OR ARRANGEMENT SUBJECT TO TITLE
I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (EACH, A “PLAN”), AND IS NOT ACTING ON BEHALF OF OR
INVESTING THE ASSETS OF A PLAN OR (II) IF THE TRANSFEREE IS A PLAN, OR IS ACTING ON BEHALF OF OR
INVESTING THE ASSETS OF A PLAN, EITHER THAT NO PROHIBITED TRANSACTION WITHIN THE MEANING OF SECTION
406(a) OF ERISA OR SECTION 4975 OF THE CODE WOULD OCCUR UPON THE TRANSFER OF THE NOTE OR THAT THE
CONDITION FOR EXEMPTIVE RELIEF UNDER A PROHIBITED TRANSACTION EXEMPTION HAS BEEN SATISFIED
INCLUDING BUT NOT LIMITED TO: PROHIBITED TRANSACTION CLASS EXEMPTION (“PTCE”) 96-23 (RELATING TO
TRANSACTIONS EFFECTED BY AN “IN-HOUSE ASSET MANAGER”), PTCE 95-60 (RELATING TO TRANSACTIONS
INVOLVING INSURANCE COMPANY GENERAL ACCOUNTS), PTCE 91-38 (RELATING TO TRANSACTIONS INVOLVING BANK
COLLECTIVE INVESTMENT FUNDS), PTCE 90-1 (RELATING TO TRANSACTIONS INVOLVING INSURANCE COMPANY
POOLED SEPARATE ACCOUNTS) AND PTCE 84-14 (RELATING TO TRANSACTIONS EFFECTED BY A “QUALIFIED
PROFESSIONAL ASSET MANAGER”).
-i-
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark A. Ernst, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of H&R Block, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principals;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2006
|
/s/ Mark A. Ernst | ||
| Mark A. Ernst | |||
| Chief Executive Officer | |||
| H&R Block, Inc. |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William L. Trubeck, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of H&R Block, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principals;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2006
|
/s/ William L. Trubeck | ||
| William L. Trubeck | |||
| Chief Financial Officer | |||
| H&R Block, Inc. |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of H&R Block, Inc. (the “Company”) on Form 10-Q for
the period ending January 31, 2006 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Mark A. Ernst, Chief Executive Officer of the Company, certify pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Mark A. Ernst | |||
| Mark A. Ernst | |||
| Chief Executive Officer | |||
| H&R Block, Inc. | |||
| March 31, 2006 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of H&R Block, Inc. (the “Company”) on Form 10-Q for
the period ending January 31, 2006 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, William L. Trubeck, Chief Financial Officer of the Company, certify
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ William L. Trubeck | |||
| William L. Trubeck | |||
| Chief Financial Officer | |||
| H&R Block, Inc. | |||
| March 31, 2006 |