Countrywide Eliminates Arbitration Clauses

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Countrywide Financial Corp., once among the industry's most vocal supporters of mandatory arbitration clauses, has dropped them from all of its subprime and jumbo loans.

The move, which was not announced publicly, took effect Jan. 5.

"We believe arbitration has consumer benefits, but the position of ... [Fannie Mae and Freddie Mac, which last year refused to buy loans containing such clauses] and the lack of standardized arbitration clauses forced us to evaluate our position," the company said Tuesday in a statement to American Banker. "As a result, we felt it appropriate to eliminate arbitration clauses from our agreements."

The clauses are no longer a part of subprime loans made by Countrywide's Full Spectrum and Specialty Lending Group divisions and jumbo loans made through its prime loan platform.

Ken Preston, a spokesman for Countrywide, said Tuesday that it "didn't do a sizeable number of jumbo" loans. The policy change "really affects our subprime area," he said.

According to Countrywide's most recent 13-month statistical survey, it funded about $3.9 billion in subprime loans in January and about $39.4 billion in 2004.

One industry player, who requested anonymity because he works with many lenders, called the move "another nail in the coffin for mandatory arbitration."

Countrywide "is one of the major forces in the market," he said, and it has "been known to be an incredibly staunch defender of the arbitration provisions."

"As the debate goes on," he said, a reduction in the number of companies stipulating mandatory arbitration "makes it much harder for people to say that it shouldn't be banned."

"When you have all these major players who don't do it, it's harder to defend."

Many large subprime mortgage firms, including Option One Mortgage Corp., New Century Financial Corp., Ameriquest Mortgage Co., and First Franklin Financial Corp, have either discontinued mandatory arbitration clauses or never used them.

Other players, including JPMorgan Chase & Co., do not use the clauses on mortgage loans but do on credit cards.

Citigroup Inc. …