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TILA ban on mandatory arbitration in mortgage loans takes effect June 1

Posted in Arbitration, Mortgages

The Truth in Lending Act ban on mandatory arbitration provisions in certain mortgage loans becomes effective on June 1, 2013.  Lenders now using mortgage loan documentation containing such provisions should take steps to ensure that they (and references to them) are removed from documentation to be used for loans that will be subject to the ban. 

The prohibition was one of the Regulation Z amendments made by the CFPB’s final rule on loan originator compensation issued in January 2013.  It bans “terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction” in any agreement for a closed-end loan secured by a dwelling or an open-end loan secured by the consumer’s principal dwelling. “Dwellings” include mobile homes and trailers used as residences. 

The prohibition applies to loans for which an application is received on or after June 1, 2013.  It does not apply to loans for which the application was received before then, even if the loan is consummated on or after June 1.  Arbitration provisions in existing documents for closed loans are unaffected by the prohibition. (The prohibition, which was part of the Dodd-Frank Act, was not of great importance since very few mortgage lenders were using arbitration provisions. This is because Fannie Mae and Freddie Mac would not allow the inclusion of such provisions in loans they purchased.) 

While arbitration provisions in documents used for non-mortgage consumer financial  products and services are also unaffected by the prohibition, Dodd-Frank left open the possibility of  broader regulation of mandatory arbitration agreements.  Under Dodd-Frank Section 1028, the CFPB is required to conduct a study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services generally.

Section 1028 also authorizes the CFPB to “prohibit or impose conditions or limitations on the use of” such agreements based on the study results.  In April 2012, the CFPB took what it described as “a preliminary step in undertaking the study” by publishing a request for information about the scope, methodology and data sources for the study.  The CFPB’s study is now proceeding and Director Cordray has said at least some of the results will be publicly released this year.

For more on the arbitration ban, see our legal alert.