On February 2, 2016, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac (the GSEs) have established an Independent Dispute Resolution (IDR) process for resolving loan repurchase disputes that occur due to alleged violations of the GSE representation and warranty framework. The IDR process will be available for loans delivered to the GSEs on or after January 1, 2016.
Under the new IDR program, lenders will be able to submit unresolved loan level disputes to a neutral third party arbitrator that remain unresolved after completion of the appeal and escalation process. The IDR process will not replace the GSEs’ current appeal and escalation processes, and is expected by the GSEs to not be used with frequency. However, the GSEs anticipate that the new IDR process will benefit lenders by allowing them to resolve disputes using a process that is more streamlined and cost-efficient than litigation.
According to the announcement, the IDR process will be available to all active lenders unless they:
- Have been suspended, disqualified, terminated, or formally notified as being in default of the terms of their contract.
- Have failed to timely comply with a demand after the time for challenging a demand has expired.
- Are in default of a prior IDR award or have any outstanding amount past due to the IDR administrator.
The IDR process will include the following elements:
- Prescribed timelines for initiating the process, selecting a neutral arbitrator and conducting administrative and planning conference calls.
- Standards for case packages that must be prepared.
- An option for each party to use legal counsel and subject matter experts.
- A hearing with an arbitrator and representatives from the lender and GSEs conducted by telephone or video conference.
- A process for creating a collective proceeding from a group of mortgages that involve similar disputes (“expanded proceedings”) with the agreement of the GSE and the lender.
- Written award and brief opinion provided by the arbitrator.
- Reimbursement for certain costs and expenses by the non-prevailing party to the prevailing party.
The new process will allow the neutral arbitrator to make the final determination regarding whether a mortgage defect existed. The written award from the arbitrator will be final and binding upon and enforceable against the parties. In addition to resolution of the demand, the non-prevailing party will be responsible for paying the prevailing party a “Cost and Fee Award” (i.e., 10% of the unpaid principal balance of the related mortgage at the time the mortgage was acquired). However, if the proceedings will cover several or more mortgages, then the parties will negotiate the Cost and Fees Award prior to the commencement of IDR.
The announcement of the IDR process completes the planned scope for the selling representation and warranty framework for origination defects and remedies. The GSEs noted that specific details regarding the IDR process, including support for the arbitrator’s authority to make conclusive and binding decisions and changes to the appeals process, will be published in their Selling Guides in the near future.
The FHFA announcement is available here: http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Fannie-and-Freddie-Announce-IDR-Program.aspx.
The Fannie Mae announcement is available here: https://www.fanniemae.com/content/announcement/sel1601.pdf.
The Freddie Mac announcement is available here: http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1601.pdf.