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Effective June 1, Regulation Z Prohibits Arbitration in Mortgage Loans

by Jon Sheldon
NCLC eReports, May 2013, No. 2
Arbitration; Mortgage Loans; Truth in Lending

TILA and Regulation Z, effective June 1,[1] prohibit contract terms requiring arbitration in closed-end loans secured by a dwelling and open-end loans secured by a consumer's principal dwelling.[2] The regulation and the TILA provision also provide that no mortgage loan agreement shall be applied or interpreted to "bar a consumer from bringing an action" in court based upon a federal claim.[3] While arbitration is clearly prohibited for mortgage loans entered into after June 1, 2013, the key issue today is whether the ban should be applied retroactively to prohibit enforcement of arbitration agreements made before that date.

Is There Precedent for Interpreting the Arbitration Ban Retroactively?

Federal courts, interpreting a related Dodd-Frank Act provision prohibiting mandatory arbitration when a whistleblower brings an action, have applied the ban on arbitration retroactively.[4] Because Congress did not evidence an intent one way or another, the determinative question is whether the provision is procedural or substantive. Following the United States Supreme Court's rulings that arbitration does not affect substantive rights, and is merely procedural in providing for an alternative forum, these courts find that the provision only affects procedure and is to be applied retroactively.[5] But federal courts in other Circuits, again interpreting Dodd-Frank's limit on arbitration in whistleblower cases, have found to the contrary.[6]

Parsing the Statutory Language for Congressional Intent Concerning Retroactivity

There are two different TILA and Regulation Z subsections prohibiting arbitration. The first set, 15 U.S.C. § 1639c(e)(1) and 12 CFR 1026.36(h)(1), provide that mortgages shall not "include" terms which require arbitration. The second set, 15 U.S.C. § 1639c(e)(3) and Regulation Z 1026.36(h)(2), provide that no mortgage provision shall be "applied" to prevent a consumer from bringing a federal cause of action. The ban on arbitration in new agreements applies to both federal and state claims, while the provision forbidding the application of an arbitration only applies to federal causes of action. Both the carveout for federal causes and the use of the word "applied" suggest that Congress meant to provide retroactive protection against arbitration for consumers with federal causes of action.

Other Evidence of Congressional Intent

The same legislation[7] that prohibits arbitration in mortgage agreements also provides the Consumer Financial Protection Bureau with authority to limit arbitration more broadly for consumer credit transactions. That authority explicitly states that any restriction on arbitration only applies to agreements entered into more than 180 days after the effective date of the Bureau regulation.[8] The lack of such explicit restriction concerning the mortgage arbitration provision argues for a congressional intent to allow retroactive application.

Does Retroactive Application Impair Existing Contracts?

Retroactive application of a limit on arbitration is not allowed if it improperly impairs existing contracts. But the Supreme Court has found no impairment of contract where a statute is one "conferring or ousting jurisdiction."[9] This type of statute "takes away no substantive right but simply changes the tribunal that is to hear the case."[10] While there is a split of authority, at least some federal courts conclude that a limit on application of an arbitration requirement confers jurisdiction on the courts and does not affect substantive rights.[11] If a court finds no impact on substantive rights, then it can find that retroactive application does not impair contracts.

Copyright © 2013 National Consumer Law Center, Inc. All rights reserved.


[1] 12 CFR 1026.36(h), as amended by 78 Fed. Reg. 11279 at 11413 (Feb. 15, 2013). While the regulation's effective date is June 1, 2013, there is an argument (not accepted by any court to date) that the statutory provision on its own went into effect on July 22, 2010, Dodd-Frank's default effective date. Dodd-Frank Title XIV provisions requiring regulations go into effect on the regulation's effective date, but the arbitration provision, while found in Title XIV, does not require a regulation, leaving its effective date unclear. The argument for an earlier effective date for the statutory provision is explained in National Consumer Law Center, Truth in Lending § 1.3 (8th ed. 2012).

[2] 15 U.S.C. § 1639c(e)(1).

[3] 15 U.S.C. § 1639c(e)(3).

[4] Wong v. CKX, Inc., 890 F. Supp. 2d 411 (S.D.N.Y. 2012); Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225 (D. Mass. 2011).

[5] Id.

[6] Taylor v. Fannie Mae, 2012 WL 928170 (D.D.C. Mar. 20, 2012); Blackwell v. Bank of America Corp., 2012 WL 1229673 (D. S.C. March 22, 2012). Holmes v. Air Liquide USA, L.L.C., 2012 WL 267194 (S.D. Tex. Jan. 30, 2012); Henderson v. Masco Framing Corp., 2011 WL 30222535 (D. Nev. July 22, 2011).

[7] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (2010).

[8] Id § 1028.

[9] Landgraf v. USI Film Prods., 511 U.S. 244 (1994).

[10] Hamdan v. Rumsfeld, 548 U.S. 557 (2006).

[11] Wong v. CKX, Inc., 890 F. Supp. 2d 411 (S.D.N.Y. 2012); Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225 (D. Mass. 2011). But see Taylor v. Fannie Mae, 839 F. Supp. 2d 259 (D.D.C. 2012); Blackwell v. Bank of America Corp., 2012 WL 1229673 (D. S.C. March 22, 2012); Holmes v. Air Liquide US LLC, 2012 WL 267194 (S.D. Tex. Jan. 30, 2012); Henderson v. Masco Framing Corp., 2011 WL 3022535 (D. Nev. July 22, 2011).