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Option One Agrees to Clean Up Its Lending Practices in Pennsylvania

April 12, 2005
The U.S. Attorney's Office in Philadelphia has reached agreement with H&R Block's Option One Mortgage Corp. to curtail predatory lending. United States Attorney Patrick L. Meehan said an investigation had found that independent mortgage brokers had allegedly committed fraud in loans submitted to Option One, of Irvine, Calif.

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As part of the agreement, Option One has put in place new fraud detection systems and also agreed to give $100,000 to groups in the region involved in stopping predatory lending. Meehan said the fraud detection system will root out concentrated fraud schemes, the "very kind of schemes that destroy neighborhoods house by house, block by block."

"Predatory mortgage brokers, real estate agents, and appraisers know that large, nationwide mortgage lenders have not been paying sufficient attention to what is happening in individual neighborhoods," Meehan said.

"Lenders in California do not understand enough about what predators in Philadelphia neighborhoods are doing. Predators have taken advantage of that ignorance, victimizing neighborhoods and figuring that the lenders will not notice. The reforms will make certain that Option One notices."

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The Pennsylvania Department of Banking and The Reinvestment Fund recently issued a report on predatory lending in the state. The report identifies concentrated pockets of Pennsylvania – like Philadelphia and parts of the Poconos – that are being ravaged by foreclosures.

The report found that almost 40% of non-prime loans originated in Philadelphia in 1998 were in foreclosure at some point between 2000 and 2003.

"Reforms similar to those Option One has adopted are needed industry wide so that lenders pick up the danger signs of concentrated problems," Meehan said. "Without such reforms, such problems may go unnoticed until they become a crisis."

Included in the Banking Department’s report are Recommendations For Pennsylvania Action, which include more targeted tracking of foreclosure “hot spots,” tracking foreclosures by parties to loans (e.g., by mortgage broker, appraiser, and lender), and tracking and licensing individual mortgage brokers not just mortgage companies. These are the same reforms Option One has adopted as part of this agreement, Meehan said.

To combat unfair practices in the mortgage lending market, Meehan said the U.S. Attorney’s Office has laid out a comprehensive plan of education, prosecution and remediation.

Investigations by the U.S. Attorney’s Office discovered that independent mortgage brokers had, through several schemes, committed significant fraud in loans they submitted to Option One.

Option One is one of the largest “nonprime” lenders in the nation. It typically makes loans to borrowers with impaired credit who can otherwise not obtain traditional “prime” loans. Option One principally originates loans that are submitted by independent mortgage brokers. This type of lending is called indirect or wholesale lending.

“As a result of inquiries by our office, Option One took a hard look at its fraud detection practices, which, in turn, led Option One to make important changes to those practices,” Meehan said. “I am hopeful that other companies will follow Option One’s lead. The government cannot stop mortgage fraud on its own. It needs the help of the industry.”

A vital part of the reforms is targeted sampling. For example, Option One will now track delinquency and default rates by branch office, by loan officer, and by mortgage broker. Anomalies in these rates will trigger investigations.

By focusing its monitoring efforts, Option One should be able to find fraud that is concentrated in particular neighborhoods. A predatory mortgage broker – who may do several hundred loans in one part of Allentown, for instance – can no longer hide his practices among the tens of thousands of loans Option One originates nationwide.

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