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Deal offers mortgage relief for thousands

Lender, Mass. sign $125m settlement

By D.C. Denison
Globe Staff / August 10, 2011

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Thousands of Massachusetts homeowners will get mortgage relief under a $125 million settlement with an H&R Block Inc. subsidiary that was unveiled yesterday by Attorney General Martha Coakley.

The largest such deal ever in the state, it resolves allegations of unfair subprime lending and discriminatory practices by Sand Canyon Corp., formerly known as Option One Mortgage.

Sand Canyon, based in Irvine, Calif., will pay $9.8 million to the state.

More significantly, it will direct American Home Mortgage Servicing Inc. to begin a $115 million loan-modification program. It services about 5,500 loans in Massachusetts that originated with Option One.

In addition, about 3,000 black and Latino borrowers will be compensated for the higher broker fees they paid to Option One.

“Option One made loans that it knew were likely to fail, and it discriminated against African-American and Latino borrowers,’’ Coakley said during a news conference yesterday.

Option One originated about 32,400 loans in Massachusetts between 2004 and 2007 - including 4,300 for black and Latino borrowers - before the market for subprime loans collapsed and the company ceased mortgage lending.

Subprime lending, rampant during the housing boom, involved loaning money at high interest rates to people with tarnished credit or incomes too low to justify the amount they borrowed.

Yesterday’s agreement, reached after more than three years of investigation and litigation by the attorney general’s office, will allow homeowners victimized by Option One to write down their principal balances or reduce their interest rate payments, depending on how their loans were structured. Black and Latino borrowers will be eligible to receive reimbursement for exorbitant payments they were required to make.

“This is a really strong settlement, because Option One was one of the most notorious practitioners of predatory mortgage loans,’’ said Lew Finfer, director of the Massachusetts Communities Action Network, a federation of community organizations that has worked extensively on foreclosure-prevention issues.

“Some of the marketing of these loans was targeted toward black and Latino home buyers, so they bore an disproportionate burden,’’ Finfer said, “but Option One’s activities also contributed to the current financial instability that we are all dealing with now.’’

Option One is now operating as Sand Canyon, whose parent company is H&R Block.

“We are pleased with the final outcome and believe this is good for all parties involved,’’ Dale Sugimoto, president of Sand Canyon, said in a prepared statement.

In a lawsuit, Coakley had alleged that Option One knew many of its loans were doomed to fail but made them anyway, so it could generate fees and then bundle loans to sell to the secondary market at a profit.

The state also said Option One’s discretionary pricing policies gave mortgage brokers free rein to charge hefty and unjustified fees, mostly targeting blacks and Latinos.

American Home, which now owns Sand Canyon’s loan-servicing business, will work with borrowers who are 45 or more days delinquent to negotiate lower payments, according to the settlement.

Typically, payments are reduced to between 31 and 36 percent of a borrower’s gross monthly income. Those with the riskiest loans will be eligible for the biggest reductions.

The settlement comes as federal officials and 50 state attorneys general, including Coakley, continue to negotiate a larger settlement with some of the biggest mortgage servicers, including Bank of America Corp., over their mortgage and foreclosure practices.

Melissa Karpinsky, a spokeswoman for Coakley, said the deal with the H&R Block unit “is shaping our approach to the 50-state settlement negotiations.’’

D.C. Denison can be reached at denison@globe.com.