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Lending / The Ticker

The end of arbitration agreements in lending docs is nigh

The Truth in Lending Act’s new ban on the placement of mandatory arbitration agreements within certain mortgage lending documents takes effect June 1, 2013, banking attorneys warn.

The change means lenders currently using documents subjected to the ban should use the next few weeks to take the necessary steps to remove mandatory arbitration provisions from items subjected to the rule, attorneys with Ballard Spahr said in an industry-wide alert.  

The ban was created by a Regulation Z amendment, enacted by the Consumer Financial Protection Bureau through its final rule on loan originator compensation.

The rule effectively "bans terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the (lending) transaction."

It applies to contracts for "closed-end loans secured by a dwelling or an open-end loan secured by the consumer’s principal dwelling," Ballard Spahr said.

The ban only applies to loans tied to applications received on or after June 1, 2013.

If a loan application was received before the cut-off date and consummated after the deadline, the ban does not apply.

To date, few mortgage lenders use these arbitration provisions because the GSEs will not purchase loans containing these agreements, Ballard Spahr said.

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