Submitted by: Fannie Mae
Categories: Business Ethics
Posted: Apr 11, 2000 – 12:00 AM EST
Apr. 11 /CSRwire/ - To help protect consumers from abusive lending practices, the nation’s largest source of financing for home mortgages has established new anti-predatory lending policies for the loans it purchases from lenders. Fannie Mae (NYSE/FNM) will notify lenders today of its new business guidelines.
"The vast majority of lenders provide the highest level of consumer service and treat their customers honestly and respectfully. Together, they and we have succeeded in raising the U.S. homeownership rate to the highest level ever," said Raines yesterday to a group of housing leaders. "But in light of recent indisputable evidence that some predators are taking unfair advantage of consumers and stripping them of wealth and equity, we feel an obligation to clearly state our expectations and standards."
Fannie Mae has long been concerned about predatory lending. In an address to Columbia University in April 1999, Raines said, "The mortgage finance industry has a responsibility to police bad actors, protect consumers, and establish standards for what constitutes appropriate lending standards."
"Fannie Mae wants to work with everyone in our industry to isolate those practices that harm homeowners when we’re making so much progress in advancing homeownership. But our first order of business is to set forth clearly the loans we will not finance," said Raines.
At a meeting of Fannie Mae’s Housing Impact Advisory Council, Raines summarized the new restrictions.
"We don’t want loans where the borrower was steered away from better alternatives for which they qualify or where it’s clear the borrower cannot possibly afford to pay," Raines told the group of housing advocates and officials. "We don’t want loans that harm the borrower."
"Fannie Mae wants to make sure that the mortgages that are delivered to us treat borrowers who have blemished credit records fairly and are not originated using predatory lending practices," said Raines.
The following is a summary of new guidelines that Fannie Mae is announcing through a letter to lenders (#LL03-00):
Steering -- For loans delivered to Fannie Mae, the company expects that lenders will have determined the borrower’s ability and willingness to repay the mortgage debt regardless of the underwriting method the lender uses. In addition, lenders should have practices and procedures to offer mortgage applicants the full range of products for which they qualify, and should specifically avoid the steering of borrowers to high-cost products that are designed for less creditworthy borrowers if the applicants can qualify for lower-cost products. Similarly, consumers who seek financing through a lender’s higher-priced subprime lending channel should be offered (or directed toward) the lender’s standard mortgage product line if they are able to qualify for one of the standard products.
A lender also may choose to employ Fannie Mae’s automated underwriting software, Desktop Underwriter® (DU), in which the borrower’s ability to repay the debt is one of the key components for evaluating the eligibility of individual mortgages for delivery to Fannie Mae. DU provides a lender with a credit assessment recommendation, which can help the lender determine the best terms for which the borrower qualifies. This helps protect the borrower against steering. Using DU in conjunction with the additional policies stated below addresses some of the lending practices through which Fannie Mae and the industry can combat predatory lending practices.
Excessive Fees -- Lenders should have their own guidelines and policies that address the fees that originators and brokers can charge a borrower when a mortgage is originated and should apply those policies consistently. For loans delivered to Fannie Mae, the points and fees charged to a borrower should not exceed 5 percent, except where this would result in an unprofitable origination (for example, because of the small size of the loan). In addition, we will not purchase a mortgage that is subject to the requirements in the Home Ownership and Equity Protection Act of 1994 (HOEPA) that apply to "high-cost" mortgages.
Prepaid Single Premium Credit Life Insurance Policies -- Fannie Mae will not purchase or securitize any mortgage for which a prepaid single-premium credit life insurance policy was sold to the borrower in connection with the origination of the mortgage loan, regardless of whether the premium is financed in the mortgage amount or paid from the borrower’s funds. This does not apply to credit life insurance policies that require separately identified premium payments on a monthly or annual basis or to prepaid hazard, flood, or mortgage insurance policies.
Prepayment Penalties -- Fannie Mae will only consider allowing prepayment penalties under the terms of a negotiated contract, and where the lender adheres to the following criteria: a mortgage that has a prepayment penalty should provide some benefit to the borrower (such as a rate or fee reduction for accepting the prepayment premium); the borrower also should be offered the choice of another mortgage product that does not require payment of such a premium; the terms of the mortgage provision that requires a prepayment penalty should be adequately disclosed to the borrower; and, the prepayment penalty should not be charged when the mortgage debt is accelerated as the result of the borrower’s default in making his or her mortgage payments.
Full-file Credit Reporting -- Fannie Mae believes that it is important for a borrower’s entire payment history to be reported to the credit repositories since that gives a borrower who has a good payment record more opportunities to obtain new financing (and better mortgage terms) when the need arises. Therefore, the company restated its policy that lenders must report on the status of any Fannie Mae loan that they are servicing each month to the credit repositories.
Servicing Practices -- Fannie Mae generally requires servicers to maintain escrow deposit accounts for the monthly deposit of funds to pay taxes, ground rents, mortgage insurance premiums, etc. In some cases, the company will allow its servicers to waive the requirement on a case-by-case basis. However, the company suggests that waivers should not be granted in the case of borrowers with blemished credit records to protect them from additional risk of default.
"I want to congratulate Fannie Mae for adopting these important principles," said U.S. Senator Paul S. Sarbanes (D-MD). "We need to cut off the capital flowing to those certain lenders who employ the kind of predatory practices these guidelines identify; while at the same time provide a steady flow of capital to those lenders who provide credit at reasonable terms, even to people who may have had some credit problems in the past. With these principles, Fannie Mae is helping to accomplish these important goals."
"Fannie Mae’s guidelines are a significant step forward in the effort to combat predatory lending practices," said Congressional Black Caucus Chair James Clyburn (D-SC). "Such practices have had a disproportionately severe impact on minority, low- and moderate-income, and other underserved borrowers -- borrowers who are struggling to achieve and maintain the dream of homeownership. I hope that Fannie Mae's leadership will have a catalyzing effect on the entire industry."
"As Chairman of the Housing and Community Opportunity Subcommittee, I have been very concerned about the impact that predatory lending can have on homeownership and community development," said Congressman Rick Lazio (R-NY). "I am pleased to see that predatory lending has the attention of Congress, the regulatory agencies, and the mortgage finance industry. Fannie Mae's announcement of its lending guidelines is a welcome initiative in the effort to combat abusive and predatory lending practices."
The company’s move against predatory lending follows the company’s recently released Mortgage Consumer’s Bill of Rights, which Raines has used to call for housing industry participation to promote consumer advocacy in housing finance.
"Predatory lending violates three basic mortgage consumer rights: the right to access to suitable mortgage credit; the right to the lowest cost mortgage for which a consumer can qualify; and, the right to know the true cost of a mortgage," said Raines. "We will work with community advocates and lenders to stamp out predatory lending practices, which prohibit a consumer’s ability to access mortgage credit fairly."
"Fannie Mae’s announcement today is a major and an important step in helping to end the predatory practices that are stripping wealth from our communities. The NeighborWorks organizations with whom we work are rooted in their communities. The flow of affordable, suitable credit to these communities is vital to grow wealth by lower income families. These policies will help maintain that flow," said George Knight, Executive Director of the Neighborhood Reinvestment Corporation.
"Fair and suitable mortgage credit is essential for the health and stability of neighborhood. The Enterprise Foundation Network of community-based organizations works with many fine lenders who are providing fair and affordable credit," said Bart Harvey, Chairman and CEO of The Enterprise Foundation. "Fannie Mae’s guidelines will support these lenders with groundrules for playing its role as a responsible investor."
"We know that problems such as race discrimination, deceptive marketing, and predatory lending are not universal in the mortgage industry. But recent investigations at all levels of government indicate that lending abuses are widespread and appear to be increasing in number," said Wade Henderson, Executive Director of the Leadership Conference on Civil Rights. "Fannie Mae’s guidelines establish a benchmark for the entire industry. It’s an important step."
"I applaud Fannie Mae’s leadership in announcing these guidelines. Self Help’s goal is to help people with low wealth, who have historically been underserved by banks and others, gain access to capital to build better lives," said Martin Eakes, President and CEO of the Self Help Credit Union. "Sometimes these families need specialized products because of their circumstances, but no one should be victimized by unscrupulous predatory practices. Fannie Mae’s guidelines will go a long way toward establishing a standard that will help protect consumers from predators."
Fannie Mae is committed to providing mortgage financing to borrowers with blemished credit histories. The company currently offers two mortgage products through DU designed to assist those borrowers – the Expanded Approval mortgage and the Timely Payment Rewards mortgage. Both of these mortgage products have an initial interest rate that is less than the average interest rate that is available for comparable subprime loans. In addition, with the Timely Payment Rewards mortgage, the borrower’s interest rate will automatically be reduced after he or she successfully makes payments on the mortgage for 24 consecutive months, thus eliminating the time and costs involved in a typical refinancing.
"Through Fannie Mae’s Timely Payment Rewards, Fleet has been able to offer borrowers with blemished credit records a lower cost mortgage and a second chance to improve their credit record," said Bill Schenck, Chairman and CEO of Fleet Mortgage Group. "Fleet applauds Fannie Mae’s leadership in ensuring that high quality mortgage practices are applied across all segments of the market."
Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation’s largest source of financing for home mortgages. Over the past 31 years, Fannie Mae has provided nearly $2.8 trillion of mortgage financing for over 34 million families. More information about Fannie Mae can be found on the Internet at http://www.fanniemae.com.
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