H&R Block Settles Massachusetts Subprime Probe

H&R Block Inc agreed to modify $115 million of home loans and make a $9.8 million payment to resolve charges by Massachusetts that the company's former Option One subprime lending unit discriminated against thousands of black and Hispanic borrowers.

Option One, now known as Sand Canyon Corp, employed ``a business model that absolutely failed to gauge the ability of borrowers to repay the loans,'' Massachusetts Attorney General Martha Coakley said at a Boston news conference. ``Those loans did not take into account anything but the fees that were to be generated.''

Tuesday's settlement resolves a lawsuit brought in 2008 in Suffolk County Superior Court.

Coakley accused Option One of making home loans from 2004 to 2007 that borrowers did not qualify for, posed an excessive risk of default and foreclosure, and carried unjustified fees.

She said it was the first case by a state attorney general to accuse a subprime lender of civil rights violations.

The settlement calls for H&R Block to direct American Home Mortgage Servicing Inc to modify as many as 5,500 eligible Option One loans it services in Massachusetts.

It also provides a $5 million contingency for modifications that cannot be made. The $9.8 million payment includes restitution for consumers, as well as fees and costs.

American Home Mortgage is owned by billionaire investor Wilbur Ross. In 2008, he bought Option One's mortgage servicing business from H&R Block, which is also the largest U.S. tax preparer. Option One had stopped offering mortgages the prior year after incurring about $1 billion of losses.

Dale Sugimoto, president of Sand Canyon, in a statement said the Irvine, California-based company is pleased to settle. Sand Canyon did not admit wrongdoing. H&R Block is based in Kansas City, Missouri.

In morning trading, H&R Block shares were up 20 cents at $12.93 on the New York Stock Exchange.