WASHINGTON A prohibition on mandatory arbitration provisions in certain mortgage loans is now just two weeks away.
The Truth in Lending Act (TILA) ban on such mortgage loans goes into effect June 1. Lenders now using mortgage loan documentation containing such provisions are being urged to take steps to ensure that they (and references to them) are removed from documentation to be used for any loans that will be subject to the ban.
The prohibition was one of the amendments to Regulation Z made by the Consumer Financial Protection Bureau’s final rule on loan originator compensation issued in January 2013. Intended to implement new TILA Section 129C(e), which was added by the Dodd-Frank Act, 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. The prohibition does not affect arbitration provisions in existing documents for closed loans. (The prohibition 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.)
