WASHINGTON, DC, December 9, 2003 -- Consumer, civil rights and lending groups today hailed Freddie Mac's recent decision to ban mandatory arbitration clauses from all subprime loans it purchases. The groups include AARP, Leadership Conference on Civil Rights (LCCR), NAACP, Consumer Federation of America (CFA), National Association of Consumer Advocates (NACA), National Consumer Law Center (NCLC), National Community Reinvestment Coalition (NCRC), Association of Community Organizations for Reform Now (ACORN), Trial Lawyers for Public Justice (TLPJ), US Public Interest Research Group (U.S. PIRG), and Self-Help Credit Union. In recent years, the inclusion of mandatory arbitration language in subprime mortgage contracts has become increasingly common. Each day, many Americans unknowingly sign loan contracts containing clauses that deny them access to justice by:
  • imposing high costs to the consumer, in terms of filing fees and the additional expense of arbitration proceedings;
  • allowing arbitrators, who may not have proper training and are often selected by the lender, to decide complicated financial cases without allowing the borrower a right to appeal;
  • limiting the availability of counsel, therefore eliminating traditional procedural protections;
  • benefiting unscrupulous lenders that have used arbitration to handle disputes in secret, avoiding open and public trials that would expose unfair lending practices to the public at large.
The increasing inclusion of mandatory arbitration clauses in subprime home loans without the borrower's knowledge has been especially pernicious, disproportionately affecting seniors, low-income, African-American and other minority families. Chris Hansen, associate executive director of AARP, said, "Mandatory arbitration clauses undermine hard won consumer protections by barring homeowners from obtaining judicial scrutiny of their loans. Freddie's announcement that it will no longer buy subprime mortgage loans that contain mandatory arbitration clauses substantially enhances AARP's efforts to stamp out predatory lending practices and improve consumer protections for home borrowers. AARP applauds Freddie Mac for its leadership in seeking to eliminate this unfair practice." LCCR Executive Director Wade Henderson said, "Unscrupulous lenders have used mandatory arbitration to close the courtroom door to minority, low-income, and female-headed households, who too often unknowingly waive their constitutional right to a civil jury trial. Freddie Mac's position is to be commended by anyone in favor of equal opportunity." Hilary Shelton, director of the Washington Bureau of the NAACP, said, "If predatory terms like discriminatory prepayment penalties and unnecessary credit insurance are the bricks of the predatory lender's house, mandatory arbitration is the cement that holds it together. If no one would buy loans containing these clauses, they would be eliminated. Freddie Mac is showing real courage in standing up for the rights of African-Americans and all borrowers in demanding this practice be stopped." "From mortgage loans, to mobile homes to managed care, mandatory arbitration has become an ever-present and unfortunate fact of life for American consumers," said Travis Plunkett, legislative director of CFA. I applaud Freddie Mac for boldly challenging what has become one of the biggest threats to consumer rights today. We hope Freddie Mac's landmark action will serve as a positive example for businesses throughout the country." "Mandatory arbitration is one of the most cynical practices we see in corporate practice today," said Ira Rheingold, executive director of NACA. "It allows unscrupulous lenders to deceive consumers and commit fraud without fear of people using our centuries old justice system to right these wrongs." "This country was founded on the principle that all Americans deserve their day in court," said Margot Saunders of NCLC. "Predatory lenders have slipped in this clause to take away that fundamental right. We applaud Freddie Mac for standing up for homeowners." "NCRC applauds Freddie Mac for this courageous move which will result in raising one more barrier to those unscrupulous lenders who would prey upon trusting consumers," said John Taylor president & CEO of NCRC, a trade association for 600 community-based organizations. Maude Hurd, president of ACORN said, "Congratulations to Freddie for taking this step. It is so important for members of our communities – low and moderate income people – to have access to the courts, and to be able to enforce the law when we are confronted with deceptive and predatory loans. No one should tolerate the kind of double standard that permits mandatory arbitration clauses as regular features of subprime loans." "For years, unscrupulous mortgage lenders have been using mandatory arbitration clauses to strip low-income homeowners of their most fundamental rights," said TLPJ staff attorney Paul Bland. "Freddie Mac's decision to prohibit this practice in the loans it purchases will go a long way towards leveling the playing field for consumers." "Eliminating forced arbitration means eliminating one of the biggest, most unfair and most unmovable obstacles consumers face when seeking justice against unfair practices," said U.S. PIRG consumer program director Ed Mierzwinski. Michael Calhoun, general counsel of Self-Help, a nonprofit lender that has made available more than $3 billion in homeownership financing for low-income families and minority families nationwide, said "Mandatory arbitration clauses in mortgage contracts are incompatible with our nation's public policy of an open and fair path to homeownership. By refusing to purchase loans with mandatory arbitration language, Freddie Mac has helped to promote responsible lending and protect the wealth-building benefits of home equity." Freddie Mac, the first secondary mortgage investor to adopt a stance against mandatory arbitration clauses, institutionalizes its new policy on August 1, 2004.

Contact: Christine Kraly for CRL at 703-276-3258 or cKraly@hastingsgroup.com

Related Content