The following article is reprinted from Basis Points® , Vol. 3, Issue 10, Copyright © 2004, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

In its Announcement 04-06, released September 28, 2004, Fannie Mae addressed a variety of Selling and Servicing Guide topics, including a new policy related to mandatory arbitration clauses in loans it purchases or securitizes that close on or after October 31, 2004.

In the announcement, Fannie Mae noted that its Selling Guide states that Fannie Mae's standard security instruments, and authorized changes to those documents, do not include language that provides for arbitration. The Selling Guide also states that a mortgage that is subject to arbitration is not acceptable under Fannie Mae's standard terms.

Fannie Mae stated that although it recognizes that arbitration can be more efficient and cheaper than litigation in resolving disputes, it also recognizes that "mandatory arbitration can be used in an abusive fashion," and borrowers may unknowingly sign documents containing a mandatory arbitration clause when they would prefer to have a court decide a dispute they may ultimately have regarding the mortgage loan transaction.

Fannie Mae concluded that although its policy is that it will not purchase or securitize mortgage loans that are subject to mandatory arbitration, it has developed an exception to this policy - if the mandatory arbitration provision contains a waiver providing that in the event the mortgage is transferred or sold to Fannie Mae, the arbitration provision becomes null and void and cannot be reinstated. Therefore, neither the seller nor the servicer can require a borrower whose loan is transferred or sold to Fannie Mae to submit to arbitration in order to resolve a dispute related to the loan transaction.

Within 60 days of the sale or transfer of a mortgage containing a mandatory arbitration provision with the required waiver to Fannie Mae, the seller must provide the borrower with written notice that the waiver provision has been triggered. The notice must contain substantially the following language:

"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."

Both the seller and the servicer are required to keep a copy of the notice in their mortgage files.

Fannie Mae concluded that its position on mandatory arbitration clauses is in keeping with its "commitment to ensure that the terms and conditions of mortgages and other agreements are fair and balanced for all parties in the transaction."

Fannie Mae's announcement may be found here.

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