Fannie Mae Ceases Buying of B&C Loans with Mandatory Arbitration Clauses

posted on:
February 9, 2004

author:
Jennifer Harmon

WASHINTON – In order to combat predatory lending, Fannie Mae said it will stop purchasing subprime mortgages with mandatory arbitration clauses and will prohibit prepayment penalties longer then three years. The move is an extension of Fannie’s American Dream Commitment plan, which focuses on long-term mortgage solutions for helping families stay in their homes.

At a joint news conference/teleconference with AARP here last week, Fannie Mae said it will work to finance and preserve affordable housing for older Americans as well as independent-living and assisted-living facilities.

Attorney Tom Methvin of Beasley, Allen, Crow, Methvin, Portis & Miles, Montgomery, Ala., applauded Fannie Mac’s decision, which comes two months after Fannie Mae announced it would no longer invest or purchase subprime loans that contain mandatory arbitration clauses, starting Aug. 1, 2004.

Mr. Methvin has represented thousands of predatory lending cases across the country, and over the past few years, he says consumer protection has weakened. By signing an arbitration clause, consumers are involuntarily giving up their constitutional right to trial by jury without even knowing it.

“It’s like a cancer that has been eating away at the American justice system for the past 10 years,” he said.

“I think it is great for consumers that one more large mortgage purchaser is taking a stand. I hope other lenders follow suit to take arbitration agreements out of mortgage loans – at least, high-cost predatory loans made to the working poor at high interest rates. If not, tell the public why.”

Laurence E. Platt, a partner at Kirkpatrick & Lockhart LLP, says mortgage arbitration agreements are not customarily used on the prime side of loans, and the debate continues over whether arbitration is helpful or harmful to customers.

“It’s certainly not a clear-cut issue,” he said. Fannie Mac and Fannie Mae have decided when it comes to predatory lending issues, investors should choose their battles wisely. It’s such a nominal part of their business anyway. But the issue remains, the public policy question over whether arbitration which is encouraged by federal law ought to be prohibited by state law.”

Under the five-year plan, Fannie Mae business managers and AARP staff will conduct roundtable sessions twice a year to mark the company’s progress toward goals that affect midlife and older citizens. One of the consumer strategies listed in the plan includes reverse mortgage consumer counseling.

Suzanne Boas, president of the Consumer Credit Counseling Service of Greater Atlanta Inc., supports the idea of pre- and post-loan counseling.

“Over the years, those of us who fight have only met with limited success. The Fannie Mae commitment is like having a star quarterback walk onto your struggling team,” she said.

While it applauds the move by Fannie Mae, the Mortgage bankers Association has expressed concern that new guideline further add to the confusion created by different state laws and varying secondary markets.

“We commend Fannie Mae for its efforts,” said MBA chairman Robert M. Couch. “We are concerned, however, that some of the guidelines create yet another layer of rules on the primary market and will limit the choice of legitimate mortgage products that we offer directly to consumers.”

MBA believes that abusive lending practices can be eradicated through a national uniform standard of laws that will eliminate confusion in the marketplace.

Free Legal Consultation
At Beasley Allen, there is never a fee for legal services, unless we collect for you. Contact us today by filling out a brief questionnaire, or by calling our toll free number, 1-800-898-2034, for a free, no-cost no-obligation evaluation of your case.
back to top