A Better Approach To Mortgage Arbitration - 10/12/2004 - Attorney Lawyer Legal Building Codes Zoning

A Better Approach To Mortgage Arbitration
by Peter G. Miller

What Fannie Mae is doing is important because it's the nation's largest mortgage buyer. It purchases loans from local lenders with investor funds. However, Fannie Mae will only buy loans that meet its standards, which means its rules establish what is or is not acceptable in much of the mortgage marketplace.

With a mandatory arbitration clause, a borrower with a beef must take his or her dispute to a neutral party for resolution. Arbitration is generally recognized as cheaper and faster than litigation, and it also has a finality in that decisions of the arbitrator typically cannot be appealed. In addition, of course, arbitration tends to limit legal fees, something regarded as essentially unAmerican in certain circles.

The catch is that arbitration, like most things, can be abused. It may be that the arbitrator is not entirely neutral or there may be rules in the arbitration agreement which favor lenders.

Last December, Freddie Mac -- the second-largest mortgage buyer -- announced that in an effort to promote "consumer choice" it would no longer purchase loans made after August 1st which included mandatory arbitration clauses. In practice, this means that borrowers must sue to get relief when they believe a lender is doing something improper.

In its announcement, Fannie Mae says that arbitration is not such a bad thing, really. "We recognize that arbitration potentially represents a more efficient, streamlined, and less costly process to borrowers for resolving disputes than litigation."

But despite such benefits Fannie Mae still believes mandatory arbitration should be banned. Why? Two core reasons:

 

• "While Fannie Mae does not believe arbitration provisions are inherently abusive, we believe that mandatory arbitration can be used in an abusive fashion."

   

• "Borrowers who would prefer to present their grievances in court may unknowingly agree to mandatory arbitration at the time they sign their mortgage documents."

Let's take these ideas individually.

First, under the Fannie Mae standard we should ban such items as tire irons, bull horns, pre-nuptial agreements and e-mail because each can conceivably be "used in an abusive fashion." What we have here is a no-standard standard, a standard that can be applied or not applied to anything.

Second, that borrowers do not read their mortgage papers at closing is hardly shocking or unusual.

Former HUD Secretary Mel Martinez once said about closing that "if I'm a lawyer and the secretary of HUD and I'm not reading this junk" you can guess that the rest of us are also not reviewing mortgage papers line-by-line. (See: HUD Chief Seeks Simpler Sale Closings, The Washington Post, June 2, 2001)

If the HUD secretary doesn't read this stuff, does anyone? Mortgage papers could require that you sacrifice six goats on a stone alter each October 15th and no one would know because no one reads the paperwork.

Given that even Fannie Mae recognizes the benefits of arbitration, here's what it could have done to help borrowers: Instead of an absolute ban it could have written a standardized clause that would require binding arbitration for all loans that it purchased, a clause that would require resolution under the rules of the neutral and independent American Arbitration Association.

Does Fannie Mae write standard language for lenders? You bet. For example, under the new rules lenders must tell borrowers within 60 days of selling a loan to Fannie Mae that "pursuant to your mortgage loan documents, we are hereby notifying you that an interest in your loan has been transferred or sold to Fannie Mae and therefore the mandatory arbitration clause of your loan, requiring that you submit to arbitration to resolve any dispute arising out of or relating in any way to your mortgage loan, is immediately null and void."

It's not cheap or easy to hire an attorney. With a standardized and reasonable binding arbitration clause lenders would have to be more responsive to borrower complaints. Ridiculous claims could be quickly eliminated while serious issues could be resolved without years of court battles or huge legal bills. These are results that borrowers, Fannie Mae and Freddie Mac should want.