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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
Regulation Z, effective June 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.
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. 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
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.
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
But federal courts in other Circuits, again interpreting Dodd-Frank's limit on
arbitration in whistleblower cases, have found to the contrary.
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
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.
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
This type of statute "takes away no substantive right but simply changes the
tribunal that is to hear the case."
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.
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.
 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
15 U.S.C. § 1639c(e)(1).
15 U.S.C. § 1639c(e)(3).
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).
Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. No. 111-203 (2010).
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,