Fannie Bows on Mandatory Arbitration

Under pressure from consumer groups, Fannie Mae has agreed to stop purchasing subprime mortgages with mandatory arbitration clauses and prohibit prepayment penalties longer than three years.The announcement comes two months after Freddie Mac announced it would no longer invest in or purchase subprime loans that contain mandatory arbitration clauses, starting Aug. 1, 2004. Fannie plans to notify its lenders in the next few months about its new policies and the effective dates. Fannie Mae was scheduled to make the announcement Wednesday at a joint news conference with AARP. In addition, Fannie is making a commitment to finance and preserve affordable rental housing for older Americans as well as independent-living and assisted-living facilities. Mandatory arbitration precludes borrowers from suing a lender in court. AARP maintains that mandatory arbitration clauses protect predatory lenders and denies their victims access to justice.