FANNIE MAE NO LONGER INVESTING IN MORTGAGES CONTAINING MANDATORY ARBITRATION CLAUSES

EFFECTIVE OCT. 31, 2004, FANNIE MAE NO longer invests or accepts delivery of residential mortgage loan products that contain mandatory arbitration clauses.

According to Fannie Mae Announcement 04-06, Fannie Mae issued, among other things, new instructions to lenders outlining the policies for

purchasing and accepting residential mortgage loans. Specifically, the instructions included a prohibition against purchasing or accepting delivery of residential mortgage loans containing mandatory arbitration clauses. A limited exception exists, permitting the use of mandatory arbitration provisions in mortgages that contain a waiver provision. The waiver provision shall provide that if the loan is sold or an interest in the mortgage loan is transferred to Fannie Mae, the mandatory arbitration clause becomes null and void.

Fannie Mae stated in its announcement: "[O]ur standard security instruments do not include language that provides for arbitration, and our authorized changes to those documents do not permit the addition of arbitration language. The Selling Guide further states that a mortgage that is subject to arbitration-regardless of whether the arbitration language has been added to the security instrument or is part of a separate agreement-is not acceptable under our standard terms. We recognize that arbitration potentially represents a more efficient, streamlined, and less costly process to borrowers for resolving disputes than litigation. We also recognize, however, that borrowers who would prefer to present their grievances in court may unknowingly agree to mandatory arbitration at the time they sign their mortgage documents.

"While Fannie Mae does not believe arbitration provisions are inherently abusive, we believe that mandatory arbitration can be used in an abusive fashion," Fannie Mae stated. "Therefore, mortgage loans that are subject to mandatory arbitration are ineligible for sale to, or securitization by, Fannie Mae."

Neither the seller nor the servicer can require that the borrower submit to arbitration to resolve any dispute arising out of or relating in any way to the mortgage loan transaction. The seller must provide the borrower with written notice of the triggering of the waiver provision within 60 days of the transfer or sale of the mortgage loan or an interest in the mortgage loan to Fannie Mae.