CFPB Reminds Lenders of Changes to Mandatory Arbitration Provisions

The Consumer Finance Protection Agency (CFPB) reminded lenders today that new Truth in Lending Act (TILA) rules banning mandatory arbitration provisions go into effect on June 1, 2013 so all documentation for new loans should be ready to go on that date.  Changes to Regulation Z amendments relating to those provisions were contained in CFPB's final rule on loan originator compensation issued last January.

The changes ban "terms that require arbitration or any other non-judicial procedures to resolve any controversy or settle any claims arising out of the transaction" for any closed in loan secured by a dwelling. 

Loans closed before June 1 or for which applications were received after that date are not covered by the new rule, but all lenders must make sure that all loan documents for loans covered under the effective dates do not contain the arbitration provisions or any reference to them.

A CFPB spokesperson said that the new rule will not affect many mortgage lenders as Freddie Mac and Fannie Mae do not allow the provisions in loans they purchase.  While arbitration provisions are widely used in non-mortgage consumer financial products and services they are not affected by the new rule.  The Dodd-Frank Act requires CFPB to conduct a study of these agreements with authority to limit them if necessary and in April the Bureau began the first steps in conducting that study.