TILA Ban on Mandatory Arbitration in Mortgage Loans Takes Effect June 1

The Truth in Lending Act (TILA) 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 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.)

While arbitration provisions in documents used for non-mortgage consumer financial products and services are also unaffected, the Dodd-Frank Act left open the possibility of broader regulation of mandatory arbitration agreements. Under Section 1028 of the Act, 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. (For more information on the CFPB’s request, see our prior legal alert.) The study is now proceeding.

For consumer loans other than mortgage loans subject to the TILA prohibition, we believe the use of mandatory arbitration provisions remains the most effective method for expediting the resolution of disputes and minimizing litigation costs. For mortgage loans subject to the TILA prohibition or other consumer loans for which lenders elect not to use arbitration provisions, lenders should consult with counsel about other documentation language that can be used to achieve these same objectives. Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements.

The CFS Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance. The Group includes the firm's Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.

For more information, please contact CFS Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com, or Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com.