The state attorney general's office yesterday sued Option One Mortgage Corp., alleging it targeted blacks and Latinos for subprime mortgages - which were likely to wind up in foreclosure - and required them to pay higher initial fees than white customers.
The lawsuit, which was filed in Suffolk Superior Court in Boston, resembles similar private class-action suits that have expanded the growing legal caseload against subprime lenders beyond initial allegations they sold risky mortgages to people who could not afford the payments. In this case, the suit charges that Option One's lending policies were discriminatory.
Academic research based on loan company filings with federal regulators has established that even high-income blacks and Latinos in Massachusetts were far more likely to obtain risky subprime mortgages. For example, 70 percent of black and Latino borrowers earning $92,000 to $152,000 received the high-risk loans in 2005.
"A clear pattern emerged of similarly situated black and Latino borrowers who were charged higher points and fees" for subprime loans, Attorney General Martha Coakley said. The suit demonstrates "a pretty widespread practice, not just in this company but in Massachusetts," she said.
Coakley asked the court for a preliminary injunction to prevent foreclosures on mortgages secured through Option One. The state is also seeking civil penalties and restitution for borrowers. H&R Block Inc., which owned Option One and closed it in December, did not respond to a request for comment.
In March, H&R Block sold its mortgage servicing unit to AH Mortgage Acquisition Co., which was created by the New York buyout firm, WL Ross & Co. LLC. AH Mortgage is also named in the suit. In an e-mail, Wilbur Ross, WL Ross & Co.'s chief executive, said the allegations predate the deal, protecting his firm against the state's legal claims.
The attorney general's allegation that Option One violated antidiscrimination laws between 2004 and 2007 turns on the contention that brokers charged minority borrowers higher points and fees to originate their loans. The state cited four examples of unnamed minority borrowers who paid between $1,993 and $8,360 more in fees and closing costs than white borrowers with similar loans, incomes, and credit scores.
In the most extreme case, a black borrower with a 523 credit rating paid $10,635 in fees for a $167,000 refinance loan, while a white borrower with a 520 credit score paid $2,275 in fees to borrow $200,000. The suit also said Option One "knowingly targeted" minority borrowers for subprime mortgages.
H&R Block's share price has rebounded from a $17 low in January and was virtually unchanged yesterday at $23.70. One reason for the turnaround is that the company was "able to exit the mortgage business," said Kartik Mehta, a stock analyst for FTN Midwest Securities Corp. H&R Block, the national tax preparer, acquired Option One in 1997 to make its business less seasonal. That proved to be a good move during the early years of the housing boom, Mehta said. "Unfortunately, the market turned so quickly the losses were much greater than anybody anticipated," he said.
The state estimated 24 percent of Option One's loans in 2007 were made to H&R Block's tax customers. In 2005, Option One made 62 subprime mortgages in Massachusetts; that grew to 570 in the first nine months of last year.
Boston lawyer Gary Klein, who has filed discrimination suits on behalf of minority borrowers against several major subprime lenders, including Option One and Countrywide Home Loans, said the subprime industry's selling methods fostered discrimination. Loan brokers had an incentive to charge as much as they could and were not bound by objective criteria when setting fees, he said. "They're using subjective criteria, which lead loan brokers to add more to the cost for minority homebuyers," Klein said.
"The theory is that while Option One gouged borrowers of all races, they gouged black and Hispanic borrowers more," he said.
Kimberly Blanton can be reached at firstname.lastname@example.org.