H&R Block, which long struggled to sell Irvine-based subprime lender Option One Mortgage, is being sued by Massachusetts authorities who charge that its mortgage unit discriminated against black and Latino borrowers, reports Reuters.

Massachusetts is the first state to sue and accuse a subprime lender of civil rights violations, according to Reuters.

In a complaint filed Tuesday, Mass. Attorney General Martha Coakley accuses Option One Mortgage of engaging “in unfair and deceptive conduct on a broad scale.” And the complaint says the lender charged black and Latino borrowers, on average, several hundred dollars more in points and fees to close loans than similarly situated white borrowers.

Reuters cites housing industry analysts as saying the suit could galvanize authorities in other states to act and may trigger more litigation against subprime-mortgage lenders in Massachusetts. Stay tuned.

H&R Block tried to sell Option One, failed, and earlier this year settled on selling its loan servicing business to an affiliate of WL Ross & Co., generating net cash of $230 million. In December, the company said it would stop funding loans.

Related Links:

• H&R Block closes sale of Irvine loan servicing unit
• Option One losses topple H&R Block chief
• Option One loses half-billion bucks
• Option One shuts down lending, Irvine cuts unknown
• Option One gets $350 million in additional financing

(Update: explanation of advance facility.)

Tax preparer H&R Block said Thursday that it closed the sale of Irvine-based subprime unit Option One Mortgage Corp.’s loan servicing business to an affiliate of WL Ross & Co., generating net cash of $230 million.

H&R Block tried to sell Option One last year, but amid a housing slump and rising loan delinquencies the company settled on a sale of its servicing operation.

In all, the company got $1.3 billion from Ross’ American Home Mortgage Servicing, Inc. At closing yesterday, H&R used the money to repay more than $980 million on a “servicing advance facility” — that’s money the company borrowed to make payments on behalf of a delinquent borrower. It also paid off a line of credit, although it didn’t disclose the amount. “The Company’s outstanding short-term indebtedness has been reduced to zero,” it said in a release.

Richard Breeden, chairman of H&R, said in a statement, “The closing of the Option One sale is a significant milestone in the transformation and refocusing of H&R Block. We are pleased to safely transfer the servicing responsibilities of Option One into the hands of a respected and responsible purchaser. More importantly, we delivered on the promise we made to shareholders to change the future course of our company. Today’s transaction reduces risks and distractions from doing what we do best, which is serving the tax preparation needs of tens of millions of clients.”

H&R retained an interest in some servicing assets and expects to realize $57 million on it over the next 60 days with another $43 million coming later.

In all, the deal will not have a big impact on its profits, the company said.

To read the release, CLICK HERE.

Related Links:

• Option One losses topple H&R Block chief
• Option One expects to fund less than half its pipeline
• Option One loses half-billion bucks
• Option One shuts down lending, Irvine cuts unknown
• Option One gets $350 million in additional financing

(Update: Details on sale price.)

H&R Block said today it inked a deal to sell the troubled loan servicing unit of Irvine-based Option One Mortgage Corp. to billionaire investor Wilbur Ross for a potential price of roughly $1.1 billion. The tax preparer said Ross has agreed to offer jobs to a “substantial number” of employees.

Loan servicing is all that is left of Option One — H&R Block shut down its loan making operation in December after a deal to sell it to Cerberus Capital Management fell through amid rising subprime mortgage delinquencies.

The majority of the $1.1 billion sale price consists of Ross paying Option One for more than $1 billion in funds it advanced to owners of loans it services after borrowers stopped paying. Normally, Option One would get back such advances after foreclosure. Instead, it is getting about 97 cents on the dollar from Ross.

Option One currently services about $53 billion of subprime mortgages, ranking it the fourth-largest in the nation, reports the Associated Press.

As with the failed Cerberus deal, the sale price on this deal is based on a formula and could change. It is also contingent on certain things happening. You can read the company’s description of the complicated deal by CLICKING HERE. Here are key points on delinquencies and jobs at Option One:

“In the event that 30+ day delinquencies of the mortgage loans serviced by the servicing business as of the closing date exceed a specified threshold, a purchase price deduction would occur. The Buyer has agreed to offer positions with comparable terms to a substantial number of the employees of the servicing business.”

Richard Breeden, chairman of H&R Block, said in a statement: “In today’s turbulent markets, the challenge is to complete a transaction, not simply announce an agreement. We have reached what we consider to be a good agreement with WL Ross & Co., whose reputation for completing transactions is excellent. However, there is still much work to be done until the business is safely transferred at closing. We believe that this servicing business can best be carried out by an organization like WL Ross & Co. that is committed to continuing and growing the business. At the same time, completing this transaction will allow our company to be more squarely focused on what we’ve done best since 1955 - preparing America’s taxes.”

As I write this, H&R Block’s stock is up more than 2% at $17.84.

To read the AP story, CLICK HERE

Register staff writer Mary Ann Milbourn reports:

Option One Mortgage Corp. in Irvine got an additional $350 million in financing available to fund servicing advances through lender Greenwich Capital Financial Products Inc., according to an SEC filing by parent company H&R Block Inc.

The amended agreement, signed Nov. 16, gives Option One access to $750 million to fund servicing advances, up from $400 million before.

At the same time, Option One ended its $750 million warehouse facility with Greenwich. The facility was used to fund mortgage originations, but with the the drop in loan applications, Option One said it no longer was needed.

For all the details, CLICK HERE.

Option One is one of many mortgage companies hit by the subprime mortgage meltdown this year. H&R Block sought to sell the mortgage unit to private equity firm Cerberus Capital Management, but the deal faces uncertainty due to the major losses at Option One.

Fitch Ratings downgraded Option One Mortgage Corp.’s residential loan servicer ratings yesterday, citing several factors including the uncertain deal to sell the company to Cerberus Capital Management and the health of parent H&R Block.

The Irvine-based company’s prime rating dropped to ‘RPS2+’ from ‘RPS1′ and its special products rating dropped to ‘RSS2+’ from ‘RSS1′.

Fitch said the ratings remain on Rating Watch Negative where they were placed on July 17.

Here’s more on Fitch’s reasoning for its ratings, with an “offshore” reference, which I take to mean India:

“Fitch recently completed its operational review, which confirmed that Option One continues to be a capable servicer of subprime mortgages with an experienced management team, accomplished loan administration procedures, and solid internal control environment. Since Fitch’s prior review, Option One’s servicing manager departed and was replaced by the former servicing manager, who ran the servicing operation for a number of years. The company continues to make reductions to its current servicing staffing levels through attrition and leveraging offshore and domestic vendors. Option One continues to outsource back office functions to its offshore vendors and captive sites in an effort to further reduce costs. The company also outsourced several customer contact functions, including portions of loss mitigation and collection efforts. However, management recently determined that several of these customer facing functions, specifically loss mitigation are best handled by domestic associates who are more familiar with the current market conditions and issues surrounding loss mitigation, foreclosures and bankruptcies. As a result, the majority of loss mitigation and late stage collections are performed onshore in one of Option One’s site.

Historically, Option One’s special servicer rating was based on its ability to service its own defaulted loans. However, the company recently expanded its special servicing capabilities to service defaulted loans for other companies.”

If you are registered with Fitch (registration is free), read the full release by CLICKING HERE.

Lenders have reduced or eliminated some credit lines to Option One Mortgage Corp. in Irvine, said parent H&R Block in a filing today.

• J.P. Morgan ended a $1 billion line.

• Citigroup and Wells Fargo ended a $1 billion line.

Here’s why:

The Terminated Facilities were terminated in light of (i) the pending expiration of waivers of “minimum net income” covenants contained in the Terminated Facilities (which generally required OOMC to maintain a cumulative minimum net income of at least $1 on a rolling basis for the most recently ended four fiscal quarters) and (ii) reduced mortgage origination volume and decreased warehouse financing availability in the current sub-prime mortgage environment.

And there’s more:

• Citigroup extended a credit line to the end of October but reduced it to $150 million from $1.5 billion.

• Greenwich Capital Financial Products decreased its line to $750 million from $3 billion. The line runs through April 2008.

If Option One sells loans far below cost, it could be required to pay Citigroup and Greenwich a total of $90 million.

To read the filing, CLICK HERE.

H&R Block, the largest U.S. tax preparer, said today it tapped $250 million from a couple of credit lines, citing a deterioration in the market for commercial paper — short-term debt issued by companies or banks.

The company, which owns subprime lender Option One Mortgage in Irvine, borrowed the money under the name Block Financial Corp., it said in a filing.

The tax preparer also said in a release that last week it fired its auditor KPMG LLP. The move is tied to new board member Edward Shaw, one of three dissidents elected to the board on Sept. 6. Here’s what Block says:

Mr. Breeden serves as the monitor of KPMG under its deferred prosecution agreement with the Department of Justice and Mr. Shaw is also engaged in the monitorship.

The audit committee, consistent with the advice of KPMG, determined that, as a result of this relationship, the participation of the new directors either as members of the audit committee or in a manner that would be equivalent to being audit committee members, would impair KPMG’s independence.

By the way, H&R Block is still trying to sell Option One, the money-losing subprime unit that left the company vulnerable to attack by dissident investors.

H&R previously said it’s trying to work out a new deal to sell Option One to private investor Cerberus Capital Management, but the deal is in question. Option One is in violation of certain aspects of the sale agreement.

Last month Cerberus stuck its current subprime and Alt-A unit, Aegis Mortgage Corp., in bankruptcy court and Aegis stopped funding new loans.

(update)
H&R Block said today it will cut 575 jobs, or more than 20 percent of staff, at its Irvine-based subprime unit Option One Mortgage Corp.

The cuts include 85 positions in Orange County, a spokesman said. Employees were notified last month when the company first said layoffs were coming, the spokesman said.

Option One will have about 1,700 employees left nationwide after the cuts, he said.

The company expects a pre-tax charge of $19 million related to the cuts.

In a filing the tax preparer said, “The restructuring plan is designed to reduce costs and improve operating efficiencies in response to reduced mortgage loan origination volumes and current secondary market pricing levels.”

More cuts could be coming, the company said.

In May, Option One cut more than 600 jobs, including 133 or so in Orange County. That left the company with about 2,400 workers, of which about half are in the county.

H&R Block previously said it’s trying to salvage the sale of Option One to Cerberus Capital Management. Option One is in violation of certain aspects of the sale agreement.