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Truth-in-lending law bans mortgage loan arbitration clauses

A ban on mandatory arbitration clauses in some mortgage loans took effect June 1 as part of new rules created by the Consumer Financial Protection Bureau.

The rule prohibits mandatory arbitration clauses in residential mortgage loans or home equity lines of credit. Such loans cannot contain “terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction,” because consumers cannot be barred from suing in court for an alleged violation of federal law.

The ban is contained in final rules from the Consumer Financial Protection Bureau that amended the Truth in Lending Act and implemented key provisions of the Dodd-Frank Act.

The effective date means the ban covers loans for which applications are received on June 1 or later. Loans that close on or after June 1 are not covered by the rule as long as the application was received before June 1.

Mandatory arbitration clauses in existing loan documents for loans that have closed are not affected by the rule.

Further regulation on mandatory arbitration clauses in other consumer financial contracts could be on the horizon.

The CFPB is authorized by Dodd-Frank to conduct a study of mandatory arbitration provisions in financial products and service agreements and to “prohibit or impose conditions or limitations” on mandatory arbitration based on what the study finds.

Sylvia Hsieh

 

 

 

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