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Massachusetts Blocks H&R Block, Option One Foreclosures

Attorney General wants relief for endangered homeowners

November 14, 2008

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The State of Massachusetts has obtained a preliminary injunction against Option One Mortgage Corp. and H&R Block Mortgage Corp. subprime lenders that originated thousands of loans in the state.

The order prohibits Option One and American Home Mortgage Servicing, Inc., which currently services 9,700 active Massachusetts Option One loans, from initiating or advancing foreclosures on mortgage loans that are considered "presumptively unfair" under the court order.

Under the order, AHMSI must give the Attorney General's Office at least 30 days notice before it intends to foreclose on any such loan, and if the attorney general objects, obtain approval from the Court before foreclosing on a loan.

"We are pleased by the Court's decision and the relief it will afford, both to homeowners and to the communities suffering from the effects of Option One's loans," said Massachusetts Attorney General Coakley. "The economic crisis continues to worsen, and predatory subprime lending is at the core of the problem. This decision is further support that some subprime lenders engaged in irresponsible and unlawful lending practices. We intend to hold accountable those who engaged in such unlawful lending conduct."

The attorney general filed suit against Option One and its parent company, H&R Block, Inc., in June 2008, alleging that they originated thousands of risky subprime loans in Massachusetts, with reckless disregard as to whether borrowers would be able to afford their loan payments – a practice that has contributed significantly to the foreclosure crisis in Massachusetts.

According to the complaint Option One and H&R Block engaged in unfair and deceptive conduct on a broad scale by selling extremely risky loan products to Massachusetts consumers that the companies knew or should have known were destined to fail.

The complaint also alleges that the companies discriminated against black and Latino borrowers in Massachusetts by charging them higher points and fees to close their loans than similarly situated white borrowers and by targeting black and Latino consumers with marketing that pushed the sale of predatory loan products.

Under the terms of the injunction, if mortgages meet certain characteristics which make them "presumptively unfair," Option One must direct AHMSI not to foreclose upon such loans without giving the Attorney General's Office 45-days to object.

During that time, the Attorney General's Office can object to the foreclosure going forward if it is determined that the loans were so risky as to be unfair, or was originated using unfair or deceptive acts or practices. If the Attorney General's Office objects, the parties have 15 days to resolve their differences and discuss alternatives, such as an affordable loan modification.

If they cannot reach a mutually agreeable resolution in this time period, then AHMSI may only proceed with a foreclosure if it receives Court approval. In considering whether to approve a foreclosure, the Court will consider whether the loan was unfair, whether the lender took reasonable steps to work out the loan and avoid foreclosure, and whether a fair and reasonable alternative to foreclosure exists.

"Presumptively unfair"

Under the order, a loan is "presumptively unfair" if it possesses the following characteristics:

• The loan is an adjustable rate mortgage with an introductory period of three years or less;

• The borrower has a debt-to-income ratio (the ratio between the borrower's monthly debt payments, including the monthly mortgage payment, and the borrower's monthly income) that would have exceeded 50 percent if Option One had measured the debt, not by the debt due under the teaser rate, but by the debt due under the fully-indexed rate, except whenthe borrower had a student loan in which payment had been deferred at least six months from the date of submission of the mortgage loan application, in which case debt-to-income ratio need exceed only 45 percent;

• The loan has an introductory or "teaser" rate for the initial period that is at least 2 percent lower than the fully indexed rate, (unless the debt-to-income ratio is 55 percent or above, in which case the difference between the teaser rate and fully indexed rate is not relevant);

• The loan-to-value ratio of the loan is 97 percent or the loan carries a substantial prepayment penalty or a prepayment penalty that lasts beyond the introductory period.

If AHMSI intends to foreclose on a loan which it believes does not meet the standards for presumptive unfairness, it must still give the Attorney General's Office 30 days' notice, during which time the Attorney General's Office can object if it believes that the loan does possess those characteristics.

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