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Mass. AG Sues Option One

Subprime lender accused of charging minorities more than whites

June 4, 2008

By MortgageDaily.com staff

The state of Massachusetts is suing defunct Option One Mortgage Corp. and its parent over allegations it placed minority borrowers in high-cost loans and contributed to the state's foreclosure crisis. The company was criticized for encouraging networking among minority groups, paying yield-spread premiums and paying volume bonuses.

A lawsuit was filed in Suffolk Superior Court Tuesday by Massachusetts Attorney General Martha Coakley against Option One and parent H&R Block Inc., an announcement yesterday said.

The Irvine, Calif.-based subprime lender, which ended operations in December, is accused of placing borrowers in risky loans it should have known would wind up in foreclosure. In addition, the company allegedly charged several hundred dollars more in fees and points to black and Latino borrowers than similarly situated white borrowers.

The state described a system where employees and brokers were encouraged to exploit minorities' inferior credit and lack of familiarity with the credit system. Originators and brokers were also encouraged to establish relationships with real estate brokers and affiliate with networks that shared the same race or ethnicity as minority borrowers.

Among risky loan programs identified by the state were 100 percent loan-to-value mortgages, stated-income and low-documentation loans, and hybrid 2/28 adjustable-rate mortgages.

"Borrowers were qualified for ARM loans based on only their ability to pay the initial 'teaser rate,' without regard to their ability to pay the higher, adjusted rate," the state said. "Brokers and agents for Option One often promised borrowers they could simply refinance before the ARM adjustment, without disclosing that such refinancing was entirely dependent on continued home price appreciation and other factors. With no equity in their homes, many borrowers have been unable to refinance the loans."

Prepayment penalties were also cited, while YSPs and volume bonuses were allegedly used to reward mortgage brokers for placing more borrowers in loans with higher rates.

"Option One and H&R Block paid mortgage brokers compensation to place borrowers in loans with interest rates higher than those for which they qualified, and also offered lucrative financial incentives that encouraged loan officers to generate as many loans as possible for as much money as possible, without regard for whether the loans were affordable," the attorney general said. "These bonuses, also known as 'volume override incentives,' sometimes paid more than an additional $10,000 per month to loan officers."

Of 30,000 loans originated by Option One in Massachusetts between 2004 and 2007, Coakley said more than 5,700 were made to black and Latino borrowers, the state said.

Unlawful servicing practices outlined in the complaint included failing to credit payments, demanding excessive fees to avoid foreclosure and pressuring delinquent borrowers to enter unfair forbearance agreements -- enabling a foreclosure with just one day of delinquency, the press release said.

A preliminary injunction is being sought to restrict foreclosures by Option One. In addition, the state seeks civil penalties and restitution.

Block announced last month it completed the sale of Option One's servicing business to WL Ross & Co. LLC-affiliate American Home Mortgage Servicing Inc. -- which was also named as a defendant in the lawsuit.

The attorney general is attempting to obtain an injunction against both American Home and Option One from selling, transferring or foreclosing any Massachusetts mortgages without first giving the attorney general's office 90 days to review the transactions and object to foreclosures.

The state appears to be following a similar strategy it took against Fremont General and Fremont Investment and Loan.

Last month, a Massachusetts appeals court judge upheld a preliminary injunction prohibiting Fremont from foreclosing on some subprime borrowers in the state unless it submitted a notice to the attorney general's office at least 30 days before the foreclosure, giving the attorney general 45 days to object if the property is owner occupied and the loan is considered to be "presumptively unfair."

RealtyTrac reported 16,366 first-quarter filings in Massachusetts, including 9,461 Lis Pendens. The state's foreclosure rate was one filing for every 166 households, the ninth worst in the country.

Commonwealth of Massachusetts v. H&R Block Inc.
No. 1:08-cv-11225 (D. Mass.)

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