H&R Block Reaches $125 Million Settlement Over Loan Probe

H&R Block will pay $125 million to settle claims of unfair and discriminatory lending practices, with most of the money going toward repayment to borrowers who took out loans likely destined for failure, according to an announcement Tuesday by the Massachusetts attorney general.

H&R Block’s subsidiary, Option One, “made loans that it knew were likely to fail and it discriminated against African-American and Latino borrowers,” Attorney General Martha Coakley said at a press conference. ”Like our other cases against mortgage lenders and their Wall Street facilitators, this case holds this corporation accountable and provides much needed relief to homeowners.”

Approximately 4,300 Black and Latino borrowers took out loans from Option One between 2004 and 2007, according to a fact sheet from the AG’s office. On average, black borrowers paid $396 more in broker fees than “similarly situated” white borrowers. Likewise, Latino borrowers paid $497 more in broker fees than white counterparts.

The company insists it did not violate any laws.

“The settlement does not constitute any admission of wrongdoing,” Gene King, a spokesman for H&R Block, said in a statement emailed to Credit.com.

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As part of the deal, H&R Block agreed to spend $115 million to rewrite the loans of 5,500 people in Massachusetts who were sold predatory mortgages. The loans included “excessive and unjustified” fees for mortgage brokers, high debt-to-income ratios, very low down payments, and no documentation of borrowers’ incomes or assets, according to the attorney general’s office.

Also, the company made sure that borrowers could afford low “teaser” rates during the first few years of the loans, but didn’t bother to see whether the buyers could afford later payments as interest rates and balloon payments ratcheted up.

Added together, all of these risky elements made the loans “unfair because they posed an excessive risk of default and foreclosure, as evidenced by their very high loan default rate,” according to a press release by the attorney general’s office.

Many lenders sold loans with similar risky features during the housing boom. But many of those companies are depository institutions governed by federal regulators, who have been far less aggressive than some state officials, including Coakley, in enforcing fair lending laws.

H&R Block and its subsidiary Option One (which later became Sand Canyon Corp.) knew their mortgages were designed to fail, but kept selling them anyway because they were making significant profits on the secondary loan market, where they packaged the risky loans together and sold them to investors, Coakley said.

In addition to the $115 million designated for borrowers, H&R Block and Sand Canyon will pay the state a $9.8 million fine.

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Image: walknboston, via Flickr.com