Combating Predatory Lending

Freddie Mac remains steadfast in our commitment to eliminate abusive and unfair lending practices. Freddie Mac is a leader in developing and promoting responsible mortgage lending practices and we have implemented the secondary mortgage market’s most comprehensive set of credit policies restricting the sale of loans that are predatory. In addition, we work with responsible lenders and servicers to ensure consumers have access to affordable home mortgage financing.

• Excessive cost – charging interest rates and/or fees that far exceed reasonable compensation for a lender's costs or risks
• Equity stripping – lending at a high interest rate, then repeatedly refinancing at a lower interest rate to strip the borrower’s equity in order to pay new points and fees
• Failure to report borrower credit information – limiting the ability of borrowers to obtain the lowest interest rate available based on the borrower’s complete credit history
• Steering to higher-cost mortgages – referring borrowers to high-cost loans when they are eligible for lower cost financing
• Credit insurance products that are financed upfront – including single premium credit insurance that is paid in a single premium or financed in the loan amount

Additionally, in some instances, a loan product or practice may not seem predatory on its face but could become predatory if used to mislead or strip equity from borrowers.

What is Freddie Mac doing to address predatory lending issues?

Freddie Mac has instituted the secondary market’s most comprehensive set of measures to protect consumers from predatory lending practices. These measures include corporate policies, targeted mortgage products, and educational curriculums in communities and universities across the country. One such curriculum is CreditSmart®, a financial education program to help consumers understand, build and maintain good credit.

Our anti-predatory lending policies set best practice standards for Freddie Mac Sellers and Servicers.

• Freddie Mac has established requirements regarding responsible lending and we won’t do business with lenders who do not meet them. We require our Sellers to determine that the borrower has the capacity to repay the mortgage and we perform thorough on-site reviews of our subprime lenders, reviewing their loan files and business practices.
• Our Single-Family Seller/Servicer Guide promotes sound business practices such as requiring our Sellers to employ best practices that support fair lending.
• We won’t buy mortgages containing a pre-paid single premium credit insurance policy obtained with the origination of the mortgage, regardless of whether the premium is financed in the mortgage or is paid from borrower’s funds.
• We require our servicers to report full-file credit data to the credit repositories each month so borrowers can turn their good payment histories into lower-cost mortgages.
• We will not purchase loans that are covered by the Home Ownership and Equity Protection Act of 1994 (HOEPA). We were the first secondary market institution to adopt such a policy.
• As of March 2002, we will not purchase subprime loans with prepayment penalty periods greater than three years.
• Effective August 1, 2004, we will no longer invest in subprime mortgages originated on or after that date containing mandatory arbitration clauses denying borrowers access to the court system.

Freddie Mac provides Sellers with innovative loan products aimed at giving borrowers with impaired credit greater mortgage choices and with initiatives that help borrowers avoid the pitfalls of predatory lending.

• We offer products that promote responsible lending and bring liquidity and stability to the entire spectrum of the conforming mortgage market. For example, we combine a flexible refinance mortgage product with special long-term education and counseling requirements offered by NeighborWorks® affiliates.
• We also offer products to stimulate competition and increase consumer choice, like our Affordable Merit Rate® Mortgage; CreditWorks®; the elimination of special requirements for permanent and nonpermanent resident aliens; cash-on-hand and rental income and other policy flexibilities to use in conjunction with our Affordable Gold® products. In addition, EarlyIndicator® and Workout Prospector® help homeowners remain in the homes that they’ve purchased.

Freddie Mac has developed collaborative public education programs that “spread the word” to consumers about home financing alternatives and help them avoid predatory lending pitfalls.

• Catch the Dream is our effort to help more minority families benefit from homeownership, including efforts to fight predatory lending. This extensive initiative creates new opportunities for first-time homebuyers and helps remove many of the barriers that prevent minority families from becoming homeowners. Catch the Dream covers all phases of the homeownership lifecycle. The five phases are:
  • Catching the Dream – offering information to reduce barriers to homeownership arising from misinformation, mistrust, or cultural differences
  • Finding Affordable Homes – providing homebuyers with tools to find a greater choice of affordable, attractive homes
  • Equipping the Industry – strengthening the capacity of America’s housing and finance industry to meet the needs of minority families
  • Getting the Loan – broadening the array of affordable products and services for more borrowers
  • Building Wealth – promoting successful long-term homeownership through timely mortgage repayment and raised awareness of predatory lending scams
    
• Freddie Mac is dynamically engaged in a collaborative public education campaign, Don’t Borrow Trouble®. Piloted in Boston by Mayor Thomas M. Menino and the Massachusetts Community and Banking Council, the award-winning campaign is available in more than 30 cities. The comprehensive consumer awareness campaign combines the use of public education and counseling services designed to inform borrowers about the dangers of predatory lending practices. The education campaign provides consumers with a referral network to help them evade scams and resolve financial difficulties. More information is available on the Don’t Borrow Trouble site.

Freddie Mac’s mission is to promote liquidity and stability in the conforming residential mortgage market. We support anti-predatory lending legislation that is appropriately designed to protect borrowers from abusive lending practices. In particular, we believe the following principles could help frame consideration of legislation to fight predatory lending practices while guarding against unintended consequences that could diminish liquidity in the mortgage market.

Legislation should:

• Balance the interests of consumers, lenders, secondary market companies and others in promoting homeownership by developing and maintaining liquidity in the subprime sector of the market.
• Clearly define mortgage loan terms, features or mortgage market practices determined to be predatory or abusive.
• Set clear standards that apply to mortgage market participants, including mortgage loan purchasers and assignees, and appropriately distinguish among purchasers and assignees that are in the business of purchasing high cost loans and those that have policies intended to prevent such purchases.
• Provide flexibility for mortgage market participants to comply with clearly established standards in a manner determined by the nature and scope of their business operations.
• Focus on loan types that are most susceptible to abusive lending practices.
• Allow for adaptability to changes in mortgage market conditions.
• Limit the scope of liability and prohibit class action lawsuits against secondary market participants that, acting in good faith, unintentionally or inadvertently purchase a high-cost home loan.
• Encourage mortgage market participants to engage in voluntary policy initiatives and develop market-based solutions to prevent abusive or predatory lending practices.

The majority of our Sellers already have guidelines and policies in place to guard against predatory lending practices. In addition, we continually evaluate our policies and procedures, and work with the industry to expand responsible lending practices that will protect borrowers from predatory lending.

On December 28, 2000, Freddie Mac released an Industry Letter that consolidates our expectations for Seller/Servicers regarding avoidance of predatory lending practices. The February 22, 2000 Industry Letter reminds Servicers that they are required to report full-file credit information to credit reporting agencies. The April 21, 2000 Industry Letter states that Freddie Mac will not purchase mortgages originated with single-premium credit insurance. Read more on these and other Industry Letters.

In addition to state laws, the Department of Housing and Urban Development (HUD) has a regulation regarding predatory lending practices. This regulation (24 C.F.R. § 81.16) prohibits Freddie Mac from receiving credit toward the affordable housing goals for the purchase of mortgages subject to HOEPA as well as mortgages with predatory features.

In many cases, Freddie Mac’s current policies reflect HUD’s regulations. In addition, lenders that sell loans to Freddie Mac are responsible for ensuring that the loans comply with all of our Single-Family Seller/Servicer Guide requirements. We also strongly recommend that Seller/Servicers implement the guidelines set forth in Freddie Mac’s Industry Letters. Finally, we continually evaluate our policies and procedures and work with the industry to expand responsible lending practices that protect borrowers from predatory lending.