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A2-3.1-01, Lender Breach of Contract (08/05/2020)

This topic contains information on the lender’s breach of its Lender Contract, including:

Lender Breach of Contract

Fannie Mae may terminate the Lender Contract (in its entirety or its individual selling arrangement or servicing arrangement) with cause at any time and immediately, if the lender breaches any provisions of its Lender Contract, including (among other things) a failure to follow the requirements of Fannie Mae’s Guides, to meet Fannie Mae’s net worth and other financial requirements, or to meet any of the other eligibility requirements specified in the Lender Contract. A lender also breaches the Lender Contract in the event of a change in the lender’s financial or business condition, or in its operations, which in Fannie Mae’s sole judgment, is material and adverse. It is within Fannie Mae’s discretion to determine whether a particular occurrence—or the aggregate effect of multiple occurrences—warrants termination of the entire Lender Contract or a specific arrangement.

Fannie Mae’s decision to terminate a lender’s selling arrangement, servicing arrangement, or the entire Lender Contract does not entitle the lender to recover any exemplary, punitive, or consequential damages. Fannie Mae will not pay a termination fee in such cases and it may make the termination effective immediately. Fannie Mae may offset any obligations that it may owe the lender against any obligations the lender may owe Fannie Mae under any existing agreement, whether or not Fannie Mae has made any demand under such agreement and even though such obligations may not yet be immediately due. If Fannie Mae’s decision to terminate is based on the lender’s breach of the Lender Contract related to its selling arrangement, Fannie Mae may declare the lender’s outstanding cash commitments and MBS pool purchase contracts to be void—and Fannie Mae has the right to terminate the entire Lender Contract (including the lender’s servicing arrangement) for cause.

When Fannie Mae terminates a lender’s servicing arrangement for cause based on the lender’s breach of its Lender Contract related to its servicing arrangement or in connection with the termination of the entire Lender Contract, the lender will have no further rights in the servicing of the mortgages it had been servicing for Fannie Mae.

Alternatives to Contract Termination

The Lender Contract provides remedies to Fannie Mae for the lender’s nonperformance. Any remedies that are applied will, in Fannie Mae’s sole judgment, be commensurate with the associated level of risk.

Generally, Fannie Mae pursues these remedies when it believes that the lender should have an opportunity to correct the breach of the Lender Contract.

Instead of terminating all or a part of the Lender Contract (or the lender’s selling arrangement or servicing arrangement) when it has cause to do so, Fannie Mae may elect to pursue a variety of other remedies and/or may impose additional requirements as a condition for not terminating all or a part of the Lender Contract (or the lender's selling arrangement or servicing arrangement). The following list provides some possible requirements that Fannie Mae may impose as a condition for not undertaking remedies to which it is entitled by virtue of a lender’s breach:

  • requiring the lender to indemnify Fannie Mae for actual and prospective Fannie Mae losses;

  • requiring the lender to repurchase a mortgage loan or an acquired property or remit a make whole payment;

  • imposing a compensatory fee;

  • imposing a suspension or some other formal sanction against the lender;

  • requiring additional and more frequent financial and operational reporting;

  • accelerating the processing and rebuttal time periods and payment of outstanding repurchases and repurchase/indemnification obligations;

  • requiring the lender to take steps to sell and transfer all of its Fannie Mae servicing, or portions thereof as designated by Fannie Mae, to an unrelated entity upon 90 days' written notice from Fannie Mae;

  • limiting the lender from acquiring additional Fannie Mae servicing (over and above its existing servicing) in either its servicing or its subservicing portfolio;

  • modifying or suspending any contract or agreement with a lender, including termination, suspension, or rescission of any variance approved under the terms thereof;

  • requiring the lender to post collateral in the form of cash or cash equivalents reasonably acceptable to Fannie Mae in an amount determined by Fannie Mae based on the particular circumstances;

  • imposing limitations on early funding products or recourse transactions;

  • imposing limits on trading desk transactions; or

  • requiring advance payment of fees for technology services.

Fannie Mae is willing to work with lenders and consider other solutions that can correct or adequately address the concerns of Fannie Mae.

Fannie Mae has no obligation to pursue any of these alternatives, and its decision to pursue one or more of the alternatives does not waive, limit, or affect Fannie Mae’s right to terminate the Lender Contract (or one or more individual arrangements) at any time that Fannie Mae deems it appropriate to do so under the provisions of the Lender Contract. Fannie Mae’s decision not to take action against a lender at any point in time does not mean that Fannie Mae condones any action or inaction by the lender, or that Fannie Mae is waiving its right to take action in the future. Also see the Servicing Guide for information related to termination for cause.

Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2020-04 August 05, 2020