Regulatory Compliance
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It Was Just A Matter Of Time…Mandatory Arbitration Clauses

It was just a matter of time before other types of loan contracts and agreements caught up with Regulation Z amendments made in 2013, banning “terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction” in any agreement for mortgages (closed-end or open-end loans secured by a dwelling). Remember that back then? For credit unions that do not currently use arbitration clauses, this blog isn’t for you, as the publishing of this final rule will have little to no impact on you. If you do employ arbitration clauses in your contracts or agreements, read on.

As a consumer, the idea of this “protection” sounds empowering. Especially considering issues, late last year with a very large bank, that could have been mitigated had consumers been allowed to take legal action instead of being bound by mandatory arbitration outlined in account agreements. But, as a credit union compliance officer, I can only think of the work that will need to go into updating these legal documents, not to mention the exposure for frivolous class action litigation and associated costs. Then I consider the fact that this will apply to my friendly, local credit union cooperative, where I am a member-owner. Who would I sue? Myself? As usual, credit unions are thrust into the same league as big banks so we need to be prepared for what may be an undue burden. [End rant.]

Even if you are a compliance nerd like me, and enjoy analyzing document content, while watching for grammar or punctuation issues that may change a phrase’s ENTIRE meaning; there is still nothing more tedious than reviewing loan contracts and agreements. But it has to be done – not only when removing content, but a comprehensive review is especially warranted when new language is required (you will need to see your credit union’s attorney for this one). How often do you even review or make changes to these documents? Likely only when absolutely necessary because the cost can be extensive for such updates – whether in attorney consultation and review, programming time, or production with vendors. The Arbitration Rule takes effect 60 days after its publication in the Federal Register and applies to agreements entered into 180 days after that date, so plan accordingly. If you plan on having a project team for this update, you can get an early start with some of these steps:

  1. Identify: Review loan documents and agreements with any references to mandatory arbitration. Again, you will need to remove pre-dispute arbitration clauses and add mandatory language, so get your list together.
  2. Consider: Are all of the documents you identified in the same format? Do you print them or do you have a forms vendor? Do the documents and/or agreements also live online (programmed or PDFs)? Are they programmed into your lending system? Consider that each of these formats require different timelines for implementation, even after content is finalized.
  3. Coordinate: Make the most of the review. Timeline your in-house compliance review to ensure all relevant department stakeholders have an opportunity to make additions they may have thought were too insignificant to make previously.
  4. Polish: Make sure pieces are ready for primetime. Allow time for your Marketing department to polish these member-facing pieces and apply any brand standards that may have been updated or enhanced.

Once the nearly 800-page final rule is published, PolicyWorks will provide a detailed summary for our awesome clients!

Click here to view the final Arbitration Agreement rule.

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