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H&R Block Sells Subprime Mortgage Unit

By Martin H. Bosworth
ConsumerAffairs.com

April 20, 2007

H&R Block • Charges • Electronic Filing • Errors • "Free" Filing • Online • Refund Anticipation Loans • Option One Mortgage Corp. -- News • New York Stops H&R Block's Deceptive Sweepstakes Ads • California Sues H&R Block • H&R Block Sells Subprime Mortgage Unit • H&R Block Launching Its Bank • H&R Block Threatened Employees, Spitzer Charges • H&R Block Settles Tax Refund Loan Suit • H&R Block Readies New Bank as Business Soars • NY Accuses H&R Block of IRA Marketing Fraud • H&R Block Goofs on Its Own Taxes • Children's Defense Fund: Tax Refund Loans "Indefensible" • California Sues H&R Block Over Its "Instant Refund" Loans • H&R Block Doesn't Block Identity Theft • H&R Block Will Settle More Payday Loan Suits • Option One Agrees to Clean Up Its Lending Practices in PA • H&R Blocked: Consumer Groups Oppose Tax Giant's Proposed Bank • Tentative Settlement in Tax Loan Class Action • Class Action Challenges Electronic Filing Fee • Supreme Court Rejects Block Appeal in Class Action • Judge Upholds Racketeering Complaints Against H&R Block, Household • Court Clears Class-Action Suit • Tax Loans Victimize Consumers --- • All About HSBC

Tax preparation giant H&R Block has agreed to sell its faltering subprime mortgage division, Option One, to OOMB Acquisition Corp, a newly formed affiliate of private equity and hedge fund giant Cerberus Capital Management.

The estimates for the deal vary -- anywhere from $300 to $500 million -- but all sources agree that H&R Block is selling for far less than it had initially planned.

Purchased in 1997 from Fleet Bank, which later was bought by Bank of America, Option One was one of the biggest performers in the subprime lending market over the last decade. H&R Block chairman Mark Ernst reminded investors during a conference call that the division had once brought in as much as $2.8 billion in profits, exceeded only by the company's cornerstone tax preparation services.

But a faltering housing market combined with rising delinquencies from subprime borrowers led one lender after another to shutter its doors or scramble for buyers to help them make good on losses. Ameriquest, Ownit, New Century Financial, and Mortgage Lenders' Network USA all closed down, declared bankruptcy, or suffered severe financial losses and layoffs in the last several months.

In Option One's case, the Irvine, California-based lender recorded $250 million in losses relating to bad loans in the last fiscal year, and dealt out job cutbacks of its own to compensate.

Option One's brand name had previously been associated with a probe into predatory lending practices. The company settled with the Philadelphia U.S. Attorney's office in 2005 over charges that it had Option One had failed to provide proper oversight on loans independent mortgage brokers had submitted, which contributed to a wave of subprime loans and resultant foreclosures in the Philadelphia area early in the decade.

Option One has also been a frequent source of complaints from ConsumerAffairs.com readers, who have criticized the lender for failures to provide documentation for payments made, deceptive customer service practices, and tacking on unexplained and unwarranted fees and penalties to mortgage payments and sale closings.

H&R Block Tries A Makeover

H&R Block's move to distance itself from Option One gave its stock price some vitality, as investors responded positively to news that the company would refocus on its core tax business. But even without Option One dogging its heels, H&R Block has some bad business of its own on the books.

The company's practice of "refund anticipation loans," which offer customers a high-cost loan in advance of their tax refund, has led to numerous lawsuits and charges of gouging low-income and minority consumers. Representatives of the Children's Defense fund called refund anticipation loans "indefensible" for their high fees and penalties, as well as the heavy marketing focus on low-income buyers.

H&R Block settled a multi-state consumer class action lawsuit over the loans for $39 million in April 2006. The settlement offered payouts to as many as 1.7 million class action suit members who had taken out loans between 1994 and 1996.

The company is still facing lawsuits from the Attorneys General of California and New York over its lending practices. New York Attorney General Elliot Spitzer alleged that the company actively penalized tax preparers who refused to steer customers to its high-fee, low-return "Express IRA" product.

The lawsuits didn't stop H&R Block from successfully winning approval for a bank charter in September 2006, claiming that three-quarters of its customers do not have bank accounts and must pay high fees to cash their tax refund checks. Consumer groups unsuccessfully opposed the charter on grounds that a company notorious for brokering predatory loans could not be trusted with banking transactions.

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