A Consumer Financial Protection Bureau final rule goes into effect June 1 that prohibits mandatory arbitration clauses in mortgage loans.
The ban applies to closed-end and open-end home loans, as well as loans on mobile homes and trailers used as residences, according to a Mortgage Banking Update by Ballard Spahr attorney Richard Andreano.
Fannie Mae and Freddie Mac don’t allow mandatory arbitration clauses in the loans they purchase. Andreano said few lenders use
However, arbitration clauses were common in subprime mortgage products and Congress banned the practice in passing the Dodd-Frank Act of 2010.
“The prohibition applies to loans for which an application is received on or after June 1, 2013. It does not apply to loans for which the application was received before then, even if the loan is consummated on or after June 1,” according to the Mortgage Banking Update.
The prohibition does not affect arbitration provisions in existing documents for closed loans.
Separately, the CFPB is expected to push back the effective date of a final rule that would ban another common subprime lending practice.
A prohibition on the sale of single-premium credit insurance in connection with mortgage loans is due to go into effect June 1.
But the consumer bureau sought additional feedback on how the prohibition might affect other credit insurance products and that comment period ended recently.
“It is expected that the bureau will in fact delay the June 1 effective date to some later date that will give them time to study the scope of the prohibition in greater depth,” Andreano told NMN.
Meanwhile, servicers are currently required to maintain escrow accounts on higher-priced mortgage loans for at least one year. On June 1, that one-year requirement will be extended to five years on newly originated loans.
It appears the industry has programmed their systems, Andreano said, and they are ready to comply with this additional requirement.
