Combating Predatory Lending
Frequently Asked Questions
The following are frequently asked questions about Freddie Mac’s stance on predatory lending. For additional information, please contact us at 800-FREDDIE (373-3343).
- What is Freddie Mac’s position on predatory lending?
- What is predatory lending?
- What is Freddie Mac doing to address predatory lending issues?
- How does Freddie Mac’s anti-predatory lending policies impact Seller/Servicers?
- Is Freddie Mac subject to any existing regulations prohibiting 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.
There is no simple definition of predatory lending. Predatory practices are not defined in federal law, and states differ in the way they define predatory lending practices. The following practices are generally considered predatory:
- 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.
Freddie Mac has instituted one of 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 lenders, reviewing their loan files and business practices.
- Our Single-Family Seller/Servicer Guide (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.
- We do not buy or invest in mortgages that contain 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. Additionally, we have incorporated into our Guide requirements simplified guidelines for permanent and nonpermanent resident aliens, eliminating additional requirements for those who have lawful residency in the United States – U.S. citizens, permanent resident aliens and nonpermanent resident alien immigrants.
- Workout Prospector® helps our Seller/Servicers confidently analyze and structure foreclosure alternatives for Freddie Mac loans in order to reduce costs and help borrowers become long-term homeowners.
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 February 12, 2009, we released an Industry Letter restating our anti-predatory lending requirements as set forth in the Freddie Mac Guide and providing additional guidance.
A more complete reference guide to Freddie Mac's anti-predatory policies is available at http://www.freddiemac.com/learn/pdfs/uw/Pred_requirements.pdf.
In addition to state laws, the Federal Housing Finance Agency (FHFA) has a regulation regarding predatory lending practices. This regulation (12 C.F.R. § 1282.16) 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 feature
In many cases, Freddie Mac’s current policies reflect FHFA’s regulations. In addition, lenders that sell loans to Freddie Mac are responsible for ensuring that the loans comply with all of our Guide requirements. We also strongly recommend that Seller/Servicers implement the guidelines set forth in Freddie Mac 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.