Attorney General Martha Coakley Obtains Preliminary Injunction Against Option One and H&R Block, Accused of Deceptive and Discriminatory Lending Practices
BOSTON – Attorney General Martha Coakley’s Office has obtained a preliminary injunction against Option One Mortgage Corp. (“Option One”) and H&R Block Mortgage Corp. (“H&R Block Mortgage”), subprime lenders that originated thousands of loans in Massachusetts. The order, granted Monday by Judge Ralph D. Gants in Suffolk Superior Court, prohibits Option One and American Home Mortgage Servicing, Inc. (“AHMSI”), 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 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 itsparent 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, filed in Suffolk Superior Court, 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.
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% 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 when the 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% 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.
In granting the preliminary injunction, the Court found that the Attorney General’s Office had established a substantial likelihood that it will prevail in proving that Option One and H&R Block Mortgage acted unfairly by issuing mortgage loans with reckless disregard of the risk of foreclosure.
In addition to issuing the preliminary injunction, the Court also ruled in favor of the Attorney General’s Office on multiple motions to dismiss filed by the defendants. The Court rejected Option One and H&R Mortgage’s motion to dismiss the Attorney General’s first-in-the nation discriminatory lending claim by a state Attorney General against a mortgage lender. The Court’s decision, which is the first to apply Chapter 151B (a.k.a. the Massachusetts Anti Discrimination Act) to mortgage lending, held that the Attorney General’s Office could proceed with its civil rights claims, that the defendants' policies and practices and disparate pricing violate anti-discrimination law.
The court also rejected the defendants’ arguments that the Attorney General’s claims under the Massachusetts Consumer Protection Act were unconstitutionally vague, interfered with the companies’ ability to enforce their mortgage loans in violation of the Contracts Clause and Dormant Commerce Clauses of the United States Constitution, and were preempted by federal law. In roundly rejecting these contentions, the Court stated that Option One and H&R Mortgage “cannot credibly contend that they did not have fair notice that it was unfair to issue home mortgage loans in Massachusetts with reckless disregard of the risk of foreclosure” and cited the “abundant fair warning” previously given to mortgage lenders by state and federal regulators. The Court further stated that, "[a]nyone with any understanding of home foreclosure recognizes how much injury it causes to the families who resided in foreclosed homes. Consequently, any lender with even a modicum of business morality should recognize that it is immoral, unethical, and unscrupulous to issue a home loan with reckless disregard of the risk of foreclosure.” The Court also rejected the defendants’ attempt to make the Attorney General arbitrate these claims under federal arbitration law.
This is the second lawsuit that the Attorney General’s Office has filed to address unfair conduct by subprime mortgage lenders and the first lawsuit filed by a state’s Attorney General’s Office for civil rights claims against a subprime lender in the wake of the subprime lending crisis. In October 2007, the Attorney General’s Office filed a similar case against California-based Fremont General and Fremont Investment and Loan (“Fremont”), and subsequently obtained an injunction that prohibits Fremont from initiating or advancing foreclosures on presumptively unfair loans.
This lawsuit is part of Attorney General Coakley’s multifaceted initiative to combat the foreclosure crisis and predatory and discriminatory lending practices. In addition to enforcement actions, this initiative has included:
- Implementing new consumer protection regulations governing mortgage brokers and lenders, which took effect in January 2008;
- Filing both criminal and civil actions against mortgage brokers who engaged in fraudulent practices;
- Protecting vulnerable buyers from foreclosure-related schemes by bringing several enforcement actions, and barring “foreclosure rescue transactions” by Consumer Protection Act regulations; and
- Testifying before the U.S. House of Representatives Committee on Financial Services about racial and ethnic disparities in mortgage lending.
View PDF of the preliminary injunction:
Assistant Attorneys General Christopher Barry-Smith, David Monahan, Gabriel O’Malley, and Gillian Feiner of Attorney General Coakley’s Consumer Protection Division, and Assistant Attorneys General Maura Healey, Zoe Stark, Anna-Marie Tabor, and Jonathan Miller of Attorney General Coakley’s Civil Rights Division, are handling this matter, with assistance from Financial Investigator Christine Murphy, and Analyst Bryan Lincoln.