H&R Block Inc. has agreed to pay $125 million to settle a lawsuit filed by the state of Massachusetts against Option One Mortgage Corp., its former subprime lending unit.

The lawsuit had accused the unit of unfair and discriminatory lending practices.

H&R Block will pay $9.8 million to the state and offer loan modifications worth an estimated $115 million to borrowers who took out subprime loans between 2004 and 2007, according to Massachusetts Attorney General Martha Coakley's office.

American Home Mortgage Servicing Inc., which services roughly 5,500 Option One loans in Massachusetts, will institute an aggressive loan modification program that includes significant principal write-downs. (The specifics of how much principal will be forgiven through each loan modification will depend on the characteristics of each loan at the time of origination.)

H&R Block, of Kansas City, Mo., stopped funding mortgages in early 2008, the same year that Coakley filed a lawsuit against its subprime lending unit alleging civil rights violations. Coakley claimed that black and Latino customers were charged excessive and unjustified fees that forced them to pay more, on average, for home loans.

The original lawsuit had alleged that Option One originated loans that were unfair because they contained multiple risk features, including excessive debt-to-income ratios, high loan-to-value ratios, "stated income" features that did not require documentation of income or assets, and "introductory teaser" interest rates that would eventually reset beyond the borrower's ability to pay.

The suit also claimed Option One knew the loans would fail but originated them anyway to sell at a profit in the secondary market.

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