KANSAS CITY, Mo. — H&R Block Inc. said yesterday that a deal to sell its troubled mortgage lending arm has fallen through, forcing it to scrap most of the $1 billion business.

The Kansas City-based tax preparer and Cerberus Capital Management LP said that they have terminated their agreement, announced in April, for a Cerberus subsidiary to buy Option One Mortgage Corp.

H&R Block is accepting no new mortgage applications and will lay off about 620 employees, close three offices and take a $75 million restructuring charge as it shuts down operations, the company said.

The company said it will honor $30 million worth of existing commitments. Most of these will be eligible for sale to government-subsidized Fannie Mae or Freddie Mac, H&R Block said, with the rest sold to investors.

H&R Block also said it will sell its servicing business, which will result in another asset impairment charge for the quarter ended Oct. 31 of no more than $125 million. The company hired Lazard to handle that sale and said it was determining the unit's value.

Kathleen Shanley, an analyst for corporate bond research firm Gimme Credit, said in a note to clients that Option One had a net book value of $1.1 billion as of July, according to the latest available figures.

"Given the ongoing and severe deterioration in the subprime sector, it would surprise us if a $125 million charge would be sufficient to mark down this business to its current value," Shanley wrote.

Cerberus and H&R Block have tried to renegotiate the agreement regarding Option One over the past several months as the mortgage market was rocked by subprime defaults and tightened lending.

Under the original deal, Cerberus was to pay $300 million less than Option One's net asset value.

As of the company's first quarter, which ended in July, 3.09 percent of mortgages were defaulting in the first few months of payments, a situation that generally requires the company to buy back the loans from investors. That number had declined from a default rate of 3.1 percent in the fourth quarter of the past fiscal year and 3.56 percent in the third quarter.

H&R Block releases second-quarter numbers on Monday.

On Aug. 31, the company said it had stopped approving any new loans that didn't comply with Fannie Mae and Freddie Mac requirements limiting loan originations to $200 million a month. Last year, the company originated $27.1 billion in loans.

Purchased nine years ago, Option One had been a good provider to H&R Block's bottom line, accumulating $2.8 billion in pretax profits over that period. But with the meltdown of the subprime market, which provides money to people with spotty credit, the bottom dropped out for Option One as it recorded a $1.2 billion loss last year and added $331 million in losses during the first quarter of this year.

"The mortgage market today has undergone vast changes since last April when the original Cerberus deal was signed," H&R Block Chairman Richard Breeden said in a statement. "Despite the hard work and good faith of both sides, we could not find a way to restructure the original transaction to mutual satisfaction."

Breeden, a former Securities and Exchange Commission chairman, was elected to the company's board of directors in September on a platform of pushing H&R Block to sell many of its ancillary businesses and focus on its cash-rich tax preparation operations.

He replaced Mark Ernst, the company's former chief executive and president, who resigned last month and had championed the company's diversification strategy.

"We view the termination of OOMC activities (while delayed) as a positive step in the process of rebuilding HRB," Thomas Weisel Partners analyst Mark Sproule said in a research note, adding that he expected Breeden would next target the H&R Block Bank, perhaps after next year's tax filing season.

"We expect discussions of separating the bank from the holding company and operating with a long-term partnership may exist," he wrote. "Without the bank franchise, HRB will be a tax-based service provider with a strong cash stream and great brand platform to leverage into their consumer base."

Fabiola Camperi has been named president of OOMC to oversee changes in its business. Camperi currently serves as executive vice president of operations, where she oversees production and servicing.

About $34 million of H&R Block's restructuring charge will be incurred in the quarter ended Oct. 31, with the rest incurred in the quarter ending Jan. 31, along with about $7 million in previously disclosed restructuring.

H&R Block shares were down 6 cents to $19.40 in afternoon trading yesterday.