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Refund Anticipation Loan Participation Agreement

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REFUND ANTICIPATION LOAN PARTICIPATION AGREEMENT


THIS REFUND ANTICIPATION LOAN PARTICIPATION AGREEMENT (this "Agreement"), dated as of July 19, 1996, is made by and among BLOCK FINANCIAL CORPORATION, a Delaware corporation ("BFC"), BENEFICIAL NATIONAL BANK, a national banking association ("BNB"), and Beneficial Tax Masters, Inc., a Delaware corporation ("Tax Masters").


Recitals:


A. BNB and Tax Masters are parties to that certain Refund Anticipation Loan Operations Agreement with Beneficial Franchise Company, Inc., H&R Block Tax Services, Inc. ("Tax Services") and HRB Royalty, Inc. ("Royalty") of even date herewith (the "RAL Operations Agreement"), pursuant to which BNB is to make refund anticipation loans to customers of both Tax Services and its affiliates and certain franchisees of Royalty and its affiliates.


B. The parties hereto desire to enter into certain agreements relating to the purchase by BFC (or an affiliate banking institution) of a participation in refund anticipation loans made by BNB, and refund anticipation checks issued by BNB, to customers of both Tax Services and its affiliates and certain franchisees of Royalty and its affiliates.


The parties hereto, intending to be legally bound, hereby agree as follows:


ARTICLE I


DEFINITIONS


Section 1.1. Definitions. As used in this Agreement, the following terms shall have the meaning set forth below:


"Accrual Period" shall have the meaning set forth in Section 2.4(b) of this Agreement.


"Adjustment Date" shall have the meaning set forth in Section 2.4(c).


"Affiliate" of any Person shall mean any other Person controlling, controlled by or under common control with such Person.


"Applicable Percentage" shall mean percentage set forth in for a particular Tax Period in Section 2.5.


"Applicable Tax Period" shall mean any of the ten consecutive Tax Periods commencing with and including the Tax Period beginning January 1, 1997 and ending with and including the Tax Period beginning January 1, 2006.


"Average Refund Balance" shall have the meaning set forth in Section 2.4(b) of this Agreement.


"BFC" shall mean Block Financial Corporation, a Delaware corporation.


"BNB" shall mean Beneficial National Bank, a national banking association.


"Base Purchase Price" shall have the meaning set forth in Section 2.3(a).


"Block Office" shall mean an office that operates under the "H&R Block" name and is open to the public for the preparation of tax returns.


"Budget Period" shall mean, with respect to any Tax Period, the period from January 1 before the commencement of such Tax Period to and including the following December 31.


"Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in Wilmington, Delaware are authorized or obligated by law or executive order to be closed.


"CPI" shall mean the index known as United States Department of Labor, U.S. Bureau of Labor Statistics, Consumer Price Index, United States City Average, All Items (1982-84=100), or if discontinued, the successor index that most closely approximates the foregoing index.


"Claim" shall have the meaning set forth in Section 6.2.


"Closing Date" shall mean with respect to a Participation Interest, the date on which such Participation Interest is sold to BFC pursuant to this Agreement.


"Collections" shall mean (i) all finally collected funds received by BNB or Tax Masters and applied to the Participated Pool RALs, whether such finally collected funds arise from receipt of cash, checks, wire transfers, ATM transfers, exercise of rights of offset or other form of payment, (ii) promissory notes and/or other evidence of indebtedness accepted by BNB or Tax Masters from or on behalf of Obligors in payment of Participated Pool RALs (in which case such Collection shall be deemed to be received by BNB or Tax Masters for purposes of this Agreement on the Business Day on which such promissory note or evidence of indebtedness was received by BNB or Tax Masters) and (iii) all fees charged by BNB to customers of Block Offices for issuing Pool RACs (in which case such Collection shall be deemed to be received by BNB for purposes of this Agreement on the Business Day on which such RAC is delivered to the customer).


"Corporate Pool RAL" shall have the meaning given such term in the definition of "Pool RAL."


= "Corporate Satellite" shall mean a Person authorized directly by Tax Services (or an Affiliate of Tax Services) pursuant to a satellite franchise agreement to operate a Block Office. "Corporate Satellite" does not


include a Person authorized by a


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Major Franchise Agreement with Block (or an Affiliate of Block) to operate a Block Office and subfranchise others to operate a Block Office within a specified territory.


"Defaulted Pool RAL" shall mean each Participated Pool RAL with respect to which, in accordance with the RAL Guidelines and BNB's and Tax Masters' customary and usual servicing procedures for refund anticipation loans, BNB or Tax Masters has charged off as uncollectible.


"Eligible RAL" shall mean each Pool RAL:


(a) that was created in compliance on the part of BNB, in all
material respects, with the RAL Operations Agreement (or a Major
Franchisee RAL Agreement, as the case may be) and the federal Equal
Credit Opportunity Act, 15 U.S.C. ss.ss. 1691 et. seq.;


(b) (i) as to which any blank preprinted form of disclosure
statement supplied by BNB to the tax preparation office at which such
Pool RAL was originated for use in connection with the origination of
such Pool RAL complied, as to form (subject to proper completion), with
the requirements of the federal Truth-in-Lending Act, 15 U.S.C. ss.ss.
1601 et seq. ("TILA") (it being understood that the foregoing shall not
be deemed a warranty by BNB that such form has been properly completed)
and (i) that was created in compliance with the other requirements of
TILA; and


(c) as to which, at the time of the sale of the Participation
Interest in such Pool RAL to BFC, BNB or Tax Masters had good and
marketable title thereto free and clear of all Liens arising under or
through BNB or any of its Affiliates.


"Excluded RAL" shall have the meaning set forth in Section 5.2.


"Governmental Authority" shall mean the United States of America, any state or other political subdivision thereof and any entity exercising executive, legislative judicial, regulatory or administrative functions pertaining to government.


"Ineligible RAL" shall have the meaning set forth in Section 4.4(c).


"Initial Periodic Servicing Fee Percentage" shall mean the Periodic Servicing Fee Percentage initially determined for a particular Budget Period pursuant to Section 2.4(a)(iii).


"Initial Purchase Price" shall mean the initial purchase price for a Participation Interest to be paid by BFC to BNB as calculated pursuant to


Section 2.3 of this Agreement.


"Lien" shall mean any pledge, hypothecation, assignment, encumbrance, security interest, lien (statutory or other) or other security agreement of any kind or nature whatsoever, including (without limitation) any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing.


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"Major Franchisee" shall mean the Person authorized by a major franchise agreement with Tax Services (or an Affiliate of Tax Services) to operate a Block Office and to subfranchise others to operate a Block Office within a specified territory.


"Major Franchisee Pool RAL" shall have the meaning given such term in the definition of "Pool RAL."


"Major Franchisee RAL Agreement" shall mean an agreement from time to time between BNB (and/or any one or more Affiliates of BNB) and a Major Franchisee pursuant to which BNB may make refund anticipation loans to customers of Block Offices of such Major Franchisee or its subfranchisees, as the same may be amended, modified or supplemented from time to time.


"Notifying Party" shall have the meaning set forth in Section 5.2.


"Obligor" shall mean, with respect to any RAL, the Person or Persons obligated to make payments to BNB (or an Affiliate of BNB) with respect to such RAL.


"Origination Fee Adjustment" shall have the meaning set forth in Section 2.3(b) of this Agreement.


"Origination Fees" shall mean the license fees paid or payable to Tax Services, a Corporate Satellite, a Major Franchisee or a subfranchisee of a Major Franchisee as a result of the making of a Pool RAL or a Pool RAC, which are paid or payable contemporaneously with or shortly after the making of such RAL or Pool RAC.


"Originator Party" shall mean any Person or entity through whom Pool RALs or Pool RACs are made or serviced, and any other Person or entity that prepares or arranges for the preparation of a tax return for a Pool RAL or Pool RAC customer, or that files, makes or transmits or assists or arranges for the filing, making or transmission of any such tax return, refund request or Pool RAL or Pool RAC or request, or that acts as a network or service bureau in connection with any of the foregoing, or that owns, distributes, licenses or otherwise has an interest in any software or other intellectual property used in connection with any of the foregoing or in any trademark, service mark or brand name under which Pool RALs or Pool RACs are promoted.


"Participated Pool RAL" shall mean any Pool RAL in which a


Participation Interest has been sold to BFC pursuant to Section 2.1 and has not been reassigned to BNB or Tax Masters or repurchased by BNB or Tax Masters pursuant to this Agreement.


"Participation Interest" shall have the meaning set forth in Section 2.1 of this Agreement.


"Periodic Servicing Compensation" for a Budget Period shall be equal to (i) the sum, for all Participated Pool RALs made during the corresponding Tax Period, of the Servicing Adjustments paid by BFC for the Participation Interests corresponding to


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such Participated Pool RALs, plus (ii) any amount paid by BFC to BNB during such Budget Period pursuant to Section 2.4(c)(i), minus (iii) any amount paid by BNB to BFC during such Budget Period pursuant to Section 2.4(c)(i).


"Periodic Servicing Fee Percentage" shall mean the Required Servicing Compensation for a Tax Period, divided by the aggregate Principal Amount of Participated Pool RALs made in such Tax Period, as determined initially pursuant to Section 2.4(a) and adjusted from time to time pursuant to Section 2.4(b).


"Person" shall mean any legal person, including any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, governmental entity or other entity of similar nature.


"Pool RAC" shall mean any RAC issued by BNB through a Block Office owned by Tax Services, a Corporate Satellite, a Major Franchisee (or a subfranchisee of a Major Franchisee) or any of their Affiliates.


"Pool RAL" shall mean (a) any RAL made by BNB through a Block Office owned by Tax Services, a Corporate Satellite or either of their Affiliates, pursuant to or under color of (i) the RAL Operations Agreement or (ii) a referral to BNB by Tax Services, such Corporate Satellite or such Affiliates of an Obligor whose federal income tax return was filed electronically by Tax Services, such Corporate Satellite or such Affiliates pursuant to a contractual electronic filing arrangement with any other Person (a RAL described in this subclause (a) may hereinafter be referred to as a "Corporate Pool RAL") and (b) any RAL made during any Tax Period that is a RAC Service Period, through a Block Office owned by a Major Franchisee or a subfranchisee of a Major Franchisee, pursuant to or under color of (i) a Major Franchisee RAL Agreement or (ii) a referral to BNB by a Major Franchisee (or a subfranchisee of such Major Franchisee) of an Obligor whose federal income tax return was filed electronically by such Major Franchisee (or subfranchisee of such Major Franchisee) pursuant to a contractual electronic filing arrangement between such Major Franchisee (or subfranchisee) and any other Person (a RAL described in this subclause (b) may hereinafter be referred to as a "Major Franchisee Pool RAL").


"Principal Amount" of a RAL shall have the meaning given that term in the definition of "RAL."


"Qualified Expenses" shall mean all direct expenditures incurred in good faith by BNB or any of its Affiliates in connection with ordinary and routine origination and servicing of Participated Pool RALs and Pool RACs or the performance of BNB's and Tax Masters' obligations hereunder (other than the cost of repurchasing Participation Interests as required by Sections 4.3 or 4.4) or the RAL Operations Agreement (or a Major Franchisee RAL Agreement, as the case may be), including (without limitation) fees and amounts paid or payable to Originator Parties, salaries, employee benefits, data processing costs, depreciation, equipment rent, equipment maintenance, space rent, maintenance, credit reports, legal forms and supplies, non-litigation legal expenses, telephone and telegraph, postage, delivery charges, travel, purchased services and systems, professional and consulting, external staff training and other personnel-related expenses, advertising, sales promotion, collection, systems,


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systems development, check clearing, cash management, software purchase, licensing or development, fees of licensing service marks, trademarks or other intellectual property, the costs of obtaining the accountant's report obtained pursuant to Section 2.4(f) and data processing expenses; provided, however, that Qualified Expenses shall not include (i) any bad debt expense pertaining to any Participated Pool RAL, (ii) Origination Fees, to the extent duplicative of amounts as to which BFC has paid its proportionate share pursuant to the Origination Fee Adjustment, (iii) any allocated expenses not related directly to the origination of Participated Pool RALs or the making of Pool RACs, the ordinary and routine servicing of Participated Pool RALs or the performance by BNB or any of its Affiliates of BNB's and Tax Masters' obligations under this Agreement or the RAL Operations Agreement (or a Major Franchisee RAL Agreement, as the case may be), whether such expenses are allocated internally by BNB or allocated to BNB by any of its Affiliates, (iv) interest expense incurred by BNB or any of its Affiliates in connection with funding the portion of Participated Pool RALs that was not sold to, and purchased by BFC, (v) any expenses pertaining to BNB's fraud service bureau to the extent BNB receives reimbursement of such expenses by Persons other than BFC or its Affiliates, (vi) collection costs or expenses with respect to delinquent Participated Pool RALs with respect to which BNB (or any Affiliate of BNB) receives a collection fee pursuant to Section 3.4, (vii) allocations of corporate overhead expenses (including, without limitation, corporate management salaries and benefits and depreciation of general plant and equipment not specifically related to the origination and servicing of Participated Pool RALs), (viii) any cost or expense for which BNB or its Affiliates are reimbursed by a third party (other than an Affiliate of BNB) (including, without limitation, costs or expenses for which BNB is reimbursed by Tax Services pursuant to the indemnification provisions of the RAL Operating Agreement) or (ix) any expenditures for goods or services procured by BNB or any of its Affiliates that are not related directly to the origination of Participated Pool RALs, the making of Pool RACs or the performance by BNB or any of its Affiliates of its obligations under this Agreement or the RAL Operations Agreement (or a Major Franchisee RAL Agreement,


as the case may be).


In the event any expenditure that pertains to more than one Budget Period or should be capitalized and amortized or depreciated over more than one Budget Period in accordance with generally accepted accounting principles, such expenditure shall be capitalized and included in Qualified Expenses for a Budget Period only to the extent that such capitalized expenditure is (or should be) amortized or depreciated during such Budget Period in accordance with generally accepted accounting principles.


Qualified Expenses shall be allocated to Participated Pool RALs for a Budget Period on the following basis (it being understood that, to the extent that the operating unit of BNB or its Affiliates that originates and services RALs and makes RACs also deals with other electronic filing derivative products, BNB shall allocate as Qualified Expenses only the expenses of such unit that are otherwise Qualified Expenses) as it estimates in good faith are allocable to RALs and RACs and not to other electronic filing derivative products): (x) all permitted expenses as described above of BNB and its Affiliates for RALs and RACs of all types (whether or not Pool RALs or Pool RACs) during a Budget Period shall be aggregated, (y) the result shall be divided by the total number of RALs and RACs of all types made by BNB and its Affiliates during the


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corresponding Tax Period (except that RACs shall not be part of this denominator with respect to a Tax Period that is not a RAC Service Period), and (z) the result shall be multiplied by the number of RALs and RACs made by BNB and its Affiliates during such Tax Period that are Participated Pool RALs and Pool RACs (and such result shall be deemed the Qualified Expenses allocable to Participated Pool RALs and Pool RACs for such Budget Period). An illustrative example of the allocation of Qualified Expenses to Participated Pool RALs and Participated Pool RACs is set forth in Exhibit B attached hereto.


"RAC" means a check issued by BNB and delivered to a taxpayer pursuant to the Refund Anticipation Check Service.


"RAC Service Period" shall have the meaning set forth in Section 2.5.


"RAL" shall mean any refund anticipation loan from time to time made by BNB.


(a) The "Principal Amount" of a RAL shall mean the aggregate
amount paid or payable by BNB to or for the account of an Obligor in
connection with a RAL, and shall in any event include (i) the amount of
any check issued or authorized to be issued by BNB to the order of any
such Obligor, and (ii) any amounts paid or payable by BNB for the
account of Obligor to any Originator Party, the Internal Revenue
Service or any other Person (whether or not BNB has a right, contingent
or otherwise, to withhold or retain any portion of such amount). The
"Principal Amount" of a RAL shall not include the financing fee payable


by such Obligor to BNB for such RAL. Each of the foregoing elements of
a RAL shall be deemed to be made for purposes of this Agreement on the
Business Day on which BNB deposits funds into the bank account used by
BNB for the disbursement of RALs for such RAL and such fact has been
recorded in the computer files BNB uses for administering RALs.


(b) "RAL" and "Principal Amount" of a RAL, shall also include
any payment made at any time by BNB on any lost, altered or stopped
check issued by or on behalf of BNB in connection with a RAL described
in paragraph (a) (the "Underlying RAL") as well as any payment by BNB
on any replacement item issued in connection with any such lost or
stopped check (or issued in connection with any such replacement item).
Payments on any RAL described in this paragraph (b) shall be deemed to
be made for purposes of this Agreement on the Business Day when payment
is made by BNB on such item and such fact has been recorded in the
computer files BNB uses for administering RALs.


"RAL Operations Agreement" shall have the meaning set forth in Recital A of this Agreement.


"RAL Guidelines" shall mean BNB's policies and procedures from time to time relating to the operation of its refund anticipation loan business, including (without limitation) the policies and procedures for determining the credit worthiness of refund anticipation loan customers, the extension of credit to refund anticipation loan customers and relating to the collection and charge off of refund anticipation loans.


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"Reassignment Amount" shall have the meaning set forth in Section 4.3.


"Reassignment Date" shall have the meaning set forth in Section 4.3.


"Refund Anticipation Check Service" shall mean a service pursuant to which a check in the amount of a taxpayer's federal income tax refund (less the sum of (i) fees charged for the making of the check, (ii) tax preparation and electronic filing fees and (iii) other properly withheld amounts) is delivered to a taxpayer on account of a direct deposit refund (other than in connection with a RAL made in advance of receipt of the related refund). "Refund Anticipation Check Service" includes the delivery of a direct deposit refund check to a taxpayer in connection with such taxpayer's denied RAL application).


"Repurchase Value" of a Participated Pool RAL at any time shall mean the Principal Amount of such Participated Pool RAL less any Collections received with respect to such Participated Pool RAL.


"Required Servicing Compensation" means the amount of compensation BNB is entitled to receive for originating and servicing Participated Pool RALs and Pool RACs for a particular Budget Period as computed


pursuant to Section 2.4(a)(iv).


"Servicing Adjustment" shall have the meaning set forth in Section 2.3(c) of this Agreement.


"Tax Period" for any year shall mean the period from and including January 1 of such year to and including August 15 of such year.


"Tax Services" shall mean H&R Block Tax Services, Inc., a Missouri corporation.


"UCC" shall mean the Uniform Commercial Code, as amended from time to time, as in effect in any specified jurisdiction.


"Underlying RAL" shall have the meaning given that term in the definition of "RAL."


Section 1.2 Other Definitional Provisions. Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular the plural and the part the plural. The words "hereof," "herein" and "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; and Section and subsection references contained in this Agreement are references to Sections and subsections in this Agreement unless otherwise specified.


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ARTICLE II


PURCHASE AND SALE OF INTERESTS IN POOL RALS; PURCHASE PRICE


Section 2.1. Purchase and Sale of Participation Interests in Pool RALs.


(a) Purchase and Sale. Subject to the conditions set forth in this Agreement, BNB and Tax Masters agree to sell to BFC, and BFC agrees to purchase from BNB and Tax Masters, from time to time, an undivided ownership interest in, and in an amount equal to the Applicable Percentage of, all of BNB's and Tax Masters' right, title and interest in and to each Pool RAL hereafter created, including all monies due or to become due with respect thereto and all Collections pertaining thereto and other proceeds (as defined in the UCC as in effect in the State of Delaware) thereof (a "Participation Interest"). Subject to the conditions set forth herein BFC agrees to pay for, purchase and accept all Participation Interests from time to time as provided herein. Except for the representations and warranties expressly made by BNB in this Agreement, Participation Interests (and acquisition thereof by BFC) shall be without recourse to, or representation or warranty by, BNB and Tax Masters.


(b) The conveyance by BNB and Tax Masters to BFC of a Participation Interest in a Pool RAL shall be deemed to occur at the time when BNB receives in full payment from BFC of the Initial Purchase Price in respect


to such Participation Interest corresponding to such Participated Pool RAL and all other Participated Pool RALs of BNB arising on the same day. Upon such conveyance, BFC shall be considered to be the owner, to the extent of the Applicable Percentage, of a Participation Interest in such Pool RAL. The parties intend that if and to the extent that any conveyance of a Participation Interest in a Pool RAL is not deemed a sale of a Participation Interest, BNB and Tax Masters shall be deemed to have granted to BFC a security interest in the Participation Interest that was purportedly conveyed and that this Agreement shall constitute a security agreement under applicable law. BNB and Tax Masters agree to execute such financing and continuation statements, for filing in the State of Delaware as BFC may from time to time reasonably request with respect to Participation Interests hereafter created or arising.


Section 2.2. Procedure. Each Business Day not later than 9:00 a.m., Wilmington time, BNB shall give notice to BFC (which notice may be by telephone) of the number and Principal Amount of Pool RALs made by BNB on the preceding Business Day (it being understood that, for such purpose, a Pool RAL shall be deemed to be made at the time set forth in the definition of "RAL" in this Agreement), together with the Initial Purchase Price for the Participation Interest corresponding to such Pool RALs. Not later than 4:00 p.m., Wilmington time, on such Business Day, BFC shall pay to BNB the full amount of such Initial Purchase Price. Such payment shall be made to BNB at such domestic account designated by BNB by notice to BFC from time to time, in United States dollars and in funds immediately available at such office at such time, without setoff, withholding, counterclaim or other deduction of any nature whatsoever.


Section 2.3. Initial Purchase Price. The Initial Purchase Price for a Participation Interest shall be equal to the sum of:


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(a) CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH
THE SEC


(b) CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH
THE SEC


(c) CONFIDENTIAL PORTIIONS OMITTED AND FILED SEPARATELY WITH
THE SEC


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