The practice of automated underwriting by Fannie Mae and Freddie Mac is under fire in two separate lawsuits that allege the practice discriminates against some consumers.
A lawyer without a stake in the suits said they could "disrupt the whole way the secondary market is set up."
Both Fannie and Freddie carefully guard the details of their automated underwriting systems, and the secrecy has led to questions about whether the systems discriminate against some borrowers. The Department of Housing and Urban Development has been studying that question since last year, and last month HUD Secretary Mel Martinez promised to publish the results soon.
The lawsuit against Freddie, filed on Oct. 21 in the U.S. District Court for the Eastern District of Pennsylvania by a Philadelphia resident, Donald Weidman, alleges that the government-sponsored enterprise's system, LoanProspector, violated the Equal Credit Opportunity and Fair Credit Reporting acts because it did not explain why his mortgage applications with several area lenders were rejected.
The suit against Fannie, filed on Sept. 13 in the U.S. District Court for the District of Columbia by Safiyyah Rahmaan, a Wilson, N.C., resident, alleges the same things about Fannie's Desktop Underwriter system. It also claims that the system violates the Fair Housing Act because it uses credit scoring systems that are biased against minorities.
Fannie and Freddie deny the allegations and say they will fight the suits.
"We are very confident that Freddie Mac is in full compliance with the Fair Credit Reporting Act, and we will defend against the [Weidman] suit very vigorously," said Sharon McHale, a Freddie spokeswoman.
Janice Daue, a spokeswoman for Fannie, said that Desktop Underwriter's objective risk assessments actually increase the number of borrowers, both minority and nonminority, whose loans are eligible for sale to the GSE. "It fully complies with fair-lending laws."
Desktop Underwriter "is color-blind," she said. "It has never considered any prohibited factor such as race or gender in assessing default risk."
However, lawyers at Howard & Howard Attorneys PC, a Bloomfield Hills, Mich., firm that has no connection to the plaintiffs, warned that Fannie and Freddie should not be overconfident.
Sandra Traicoff, the head of Howard & Howard's financial regulatory practice, said a judge could force the GSEs to provide reports to consumers explaining each and every rejection by their systems.
Providing hundreds of thousands, if not millions, of such reports "could disrupt the whole way the secondary market is set up," she said. "The whole secondary market concept has been streamlined with the idea that people can get decisions quickly." Giving notices for each and every rejection "would be very expensive and could really slow the entire system down."
Joseph Hemker, the head of the firm's financial institutions practice, warned that the plaintiffs' bar has set its sights on Fannie and Freddie, as well as the mortgage industry in general, because of the perception that they have "deep pockets."
"The plaintiffs' attorneys have demonstrated that the mortgage industry is sort of a target for them," he said. "As a result, it is an area that has to be very carefully watched and strongly defended."
