NEW YORK (Reuters) – Freddie Mac said on Thursday it would no longer invest in mortgages that contain a provision that forces unwitting consumers to give up their right to sue their lender.

Such “mandatory arbitration clauses” are often put into sub-prime mortgages, which are loans for borrowers with patchy credit. Consumer advocates have complained that these customers usually don’t realize they are signing away their right to sue. Instead, they must resolve disputes with the lender through arbitration, which may not be as friendly to consumers.

Lenders usually select and pay for the arbitrator, which may make him or her less objective, said Eric Stein, spokesman for the Center for Responsible Lending, an anti-predatory lending research and education group in Durham, North Carolina.

Arbitrators often do not have to give reasons for their opinions, and often there is no discovery process, making it harder for a wronged borrower to track down information, Stein said.

Consumers rarely win in arbitration, and cannot appeal the decision, according to Tom Methvin, a lawyer at Beasley Allen in Montgomery Alabama who represents victims of predatory lending.

“It’s a kangaroo court,” he said.

Freddie Mac, the No. 2 source of housing finance in the United States, said it will not buy sub-prime mortgages containing the mandatory arbitration clause after Aug. 1, 2004. It already refrains from buying loans to prime borrowers with this clause.

“Freddie Mac believes that all homeowners should be able to voluntarily choose the mortgage dispute resolution option they believe to be in their best interests,” said Paul Peterson, chief operation officer at Freddie Mac, in a statement.

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