The Securities and Exchange Commission (SEC) late Tuesday reached a settlement with H&R Block subsidiary Option One Mortgage Corp. (OOMC), over charges that the now-defunct subprime lender misled investors that bought some of the firm’s MBS.
Option One, which is now known as Sand Canyon Corp. (SCC), agreed to pay $28.2 million to settle the charges — but without admitting or denying wrongdoing.
SCC/OOMC is no longer actively making nonprime loans and its servicing rights were sold a few years back to investor Wilbur Ross. The OOMC receivables are now housed at American Home Mortgage Servicing, which is based in Texas.
In its notice of charges, the SEC said OOMC “promised investors in more than $4 billion worth of RMBS offerings that it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. But Option One did not tell investors about its deteriorating financial condition and that it could not meet its repurchase obligations on its own.”
The government said OOMC’s financial condition deteriorated significantly “as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market.”
SEC enforcement director Robert Khuzami said OOMC concealed from investors that its perilous finances created risk that it would not be able to fulfill its duties to repurchase or replace faulty mortgages.
At one time, OOMC was a top 10 ranked subprime lender/servicer.
OOMC relied on parent company H&R Block for some of its financing. The SEC says the lender “needed” H&R Block (through a subsidiary) to provide it with financing under a line of credit “in order to meet its margin calls and repurchase obligations.” But the government says Block was under no obligation to provide that funding and OOMC did not disclose that information to investors.
The subprime lender/servicer “was generally profitable prior to its 2007 fiscal year. However, when the subprime mortgage market started to decline in the summer of 2006, Option One experienced a decline in revenues and significant losses.”
Since the housing crisis began four years ago the SEC has charged 102 individuals and firms in financial related enforcement actions, including 55 CEOs, CFOs and other senior corporate officers. The enforcement actions have resulted in more than $1.98 billion in penalties, disgorgement and other monetary relief for investors.