Tuesday, April 24, 2012
The SEC charged H&R Block subsidiary Option One Mortgage Corporation with misleading investors in several offerings of subprime residential mortgage-backed securities (RMBS) by failing to disclose that its financial condition was significantly deteriorating. Option One, which is now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges.
The SEC alleges that Option One 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.
According to the SEC, Option One was one of the nation’s largest subprime mortgage lenders with originations of $40 billion in its 2006 fiscal year. Option One 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, and faced hundreds of millions of dollars in margin calls from its creditors. At the time Option One offered and sold the RMBS, it 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 Block was under no obligation to provide that funding. Option One did not disclose this information to investors. The SEC further alleges that Block never guaranteed Option One’s loan repurchase obligations and that Option One’s mounting losses threatened Block’s credit rating at a time when Block was negotiating a sale of Option One.