Coakley reaches $125M settlement

by Bryan Cohen |
Aug. 9, 2011, 5:28pm


BOSTON (Legal Newsline) - Massachusetts Attorney General Martha Coakley announced a $125 million settlement on Tuesday with a mortgage originator resolving allegations of unfair and discriminatory lending practices.

Sand Canyon, formerly known as Option One, will modify thousands of Massachusetts homeowners' loans and make a significant payment to the state as part of a settlement worth $125 million. The settlement requires Sand Canyon, a subsidiary of H&R Block Inc., to pay $9.8 million to the state and direct American Home Mortgage Services Inc., the current servicer of approximately 5,500 Option One loans in the state, to institute an aggressive loan modification program that will provide an estimated $115 million in additional relief.

"Option One made loans that it knew were likely to fail and it discriminated against African-American and Latino borrowers," Coakley said.

"Its blatant disregard for prudent underwriting standards contributed to the economic downturn we still find ourselves in today. 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."

Option One originated approximately 32,400 loans in the state between 2004 and 2007. The company's loans allegedly featured multiple "risk features," including high loan-to-value ratios, excessive debt-to-income ratios and underwriting that qualified borrowers based on their ability to make payments at an introductory or "teaser" interest rate instead of their ability to pay beyond the two- or three-year introductory period.

Coakley's lawsuit alleged that the risk-layered loans were unfair because they posed an excessive risk of default and foreclosure, as evidenced by a very high loan default rate. Coakley also alleged that Option One knew that loans with such risk characteristics were doomed to fail but originated them nonetheless in order to sell them to the secondary market and make a profit.

Coakley also alleged that Option One's discretionary pricing policies gave mortgage brokers free reign to charge unjustified and excessive fees, causing Latino and black borrowers to pay more money on average for their loans. Option One originated loans to approximately 4,400 black and Latino borrowers between 2004 and 2007.

Distressed borrowers with an Option One loan are eligible for loan modifications that include significant write-downs of principal balances and reduction of interest rates, depending on the prevalence of certain risk factors in the loan.

"The modification program will make it easier for homeowners to keep their homes and even begin to acquire some equity," Coakley said. "For several years now, many homeowners have been living underwater - owing more than their homes are worth. This modification program will change that situation for many Option One borrowers, and corrects the unreasonable risks they were exposed to when the loan was made."

Option One will also pay $9.8 million to the state, which includes $8 million in consumer relief, $1 million for fees and costs and $800,000 in exchange for a release of civil penalties. The consumer relief will be used to provide direct restitution to Option One borrowers and for implementing programs to mitigate the impact of the foreclosure crisis in the state.

Coakley's office has recovered more than $563 million in relief for investors and borrowers and has returned close to $52 million in taxpayer funds back to the state.

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