Frequently Asked Questions

Unfortunately, there is no simple definition of predatory lending. Predatory practices are not defined in federal law and states differ in the way they define abusive lending practices. In some instances, a loan product or practice may not be predatory on its face - but could become predatory if used to trap or mislead borrowers. Most market participants consider the following practices predatory:

• Equity stripping - the use of repeated refinancings to strip equity
  
• Excessive cost - when interest rates and fees far exceed a lender's costs or risks
  
• Failure to report borrower credit information - limits viable refinancing opportunities available to high rate/point borrowers
  
• Reverse redlining - steering minorities, elderly or low-wealth borrowers to high-cost loans
  
• Upfront financed credit insurance products - the financing of upfront insurance premiums in the loan amount, often without borrower knowledge

Our efforts against predatory lending are focused in several areas:

• Collaborative public education programs that spread the word to consumers about home financing alternatives and predatory lending pitfalls
  
• The introduction of innovative new products and offerings for borrowers with weak credit reputations
  
• Anti-predatory lending policies and standards for all Freddie Mac Sellers and Servicers

Catch the Dream is our latest effort to help more minority families benefit from homeownership. This extensive initiative will create new opportunities for new homebuyers and help remove multiple barriers that prevent minority individuals from becoming homeowners. Catch the Dream will cover all phases of the homeownership lifecycle including efforts to fight predatory lending. The five phases are:

• Catching the Dream - overcoming barriers to homeownership (misinformation, mistrust, cultural differences)
  
• Finding Affordable Homes - focus on providing consumers a greater choice of affordable, attractive homes
  
• Equipping the Industry - strengthen the capacity of America's housing and finance industry to meet the needs of minority families
  
• Getting the Loan - broaden the array of affordable products and services for more homebuyers
  
• Building Wealth - promote successful homeownership through timely mortgage repayment and raised awareness of predatory lending scams

Get more information about Catch the Dream.

Freddie Mac is dynamically engaged in a collaborative public education campaign, Don't Borrow Trouble^sm. Piloted in Boston, MA by Mayor Thomas M. Menino and the Massachusetts Community and Banking Council, the campaign is available to all cities that belong to the US Conference of Mayors, and has been implemented in 24 cities nationwide. Using a combination of ads, billboards and public service announcements, this comprehensive campaign is designed to educate borrowers about the dangers of predatory lending practices and provide them with a referral network to assist them in avoiding scams and resolving financial difficulties.

The new Home Equity Loss Protection (HELP) initiative, which is being launched in six pilot cities across the U.S., combines a new, flexible refinance mortgage product developed by Freddie Mac with special long-term education and counseling requirements offered by NeighborWorks affiliates. The initiative is designed to help homeowners with impaired credit and excessive debt to obtain refinancing dollars on affordable terms.

We have developed new products and initiatives to stimulate competition and increase consumer choice, like our Affordable Merit Rate^sm Mortgage, the elimination of special requirements for permanent and nonpermanent resident aliens, our Cash on Hand and Rental Income options for our Affordable Gold products, and CreditWorks^sm. In addition to our suite of servicing technology tools, EarlyIndicator^sm and EarlyResolution^sm, help homeowners remain in the homes that they've purchased.

We have implemented many policies designed to safely expand homeownership opportunities while choking off opportunities for predatory lending. For example, we won't buy mortgages if single premium credit insurance (life, disability, unemployment, or property insurance) is financed out of the loan proceeds. We require lenders who do business with us 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 trigger the Home Ownership and Equity Protection Act of 1994 (HOEPA) disclosure requirements and no purchase mortgages with prepayment penalties greater than five years. However, effective October 1, 2002, we will not purchase subprime loans with prepayment penalty periods greater than three years.

Freddie Mac establishes high standards and won't do business with lenders who do not meet them. We have given our partners guidance on not referring or "steering" borrowers to higher-cost mortgage products designed for less creditworthy borrowers. We require our Sellers to determine that the borrower has the capacity to repay the mortgage. We perform thorough on-site reviews, checking loan files and re-checking business practices before we buy loans from our lenders.

Freddie Mac is working with Congress, HUD, regulators and the industry to better understand the subprime sector of the market and develop responsible practices that will protect consumers from predatory practices without limiting their opportunities to become successful long-term homeowners.

Freddie Mac has not lobbied, is not lobbying and will not lobby for state or local predatory lending law exemptions. In some cases, states and localities have exempted conforming, conventional loans from predatory lending laws to focus on the loans most likely to be predatory. These states and localities are pursuing this course of action on their own initiative in an attempt to target enforcement resources more effectively.

The Industry Letter (PDF), released on December 28, 2000, consolidates our expectations for Seller/Servicers about predatory practices and responds to the HUD regulations for our affordable housing goals. In many cases our current policies are contained in the regulations. Where the regulations go beyond our current policies, we have laid out guidelines for our Sellers and Servicers. The guidelines that we recommend for our lenders in our Industry Letter are based on HUD's regulation, but do not appear in the Guide. Although these new guidelines are not included in the Guide, Freddie Mac strongly recommends that Seller/Servicers implement them. We are continuing to review HUD's regulations in order to determine how to most effectively and efficiently achieve the objectives stated in the regulations with the least disruption to our lenders.

We continue to evaluate our policies and procedures and work with the industry to expand responsible lending practices that will protect consumers from predatory lending.

Lenders who sell loans to Freddie Mac are responsible for ensuring that the loans comply with all requirements specified in the Single-Family Seller/Servicer Guide. We recommend that lenders take steps to ensure that their brokers implement Freddie Mac guidelines as well.

Freddie Mac does not determine profit and loss scenarios for individual lenders. Any loan for which points and fees exceed 5% of loan amount must have been otherwise unprofitable for the lender.