Alternative Dispute Resolution

ABI Committee News

Anti-Arbitration Provisions in Pending Federal Legislation Dealing with the Mortgage Crisis

Various bills pending in Congress would limit enforcement of arbitration agreements. For example, Senate Bill 1782 would amend the Federal Arbitration Act to prohibit enforcement of pre-dispute arbitration agreements dealing with employment, consumer, or franchise disputes, with disputes under civil rights statutes, or with disputes under statutes designed to protect parties with lesser bargaining power from those with greater bargaining power. This brief article, however, deals only with anti-arbitration provisions included in bills that deal with the current mortgage crisis.

Several kinds of bills have been introduced in Congress in response to the mortgage crisis. One kind would permit residential mortgages to be modified, to one extent or another, in chapter 13 bankruptcy cases. Another kind would attempt to reform mortgage origination practices. Both of which include provisions that would limit enforcement of arbitration provisions.

Senate Bill 2136, the chapter 13 mortgage modification bill introduced by Senator Durbin (D-Ill.) for himself and Senator Schumer (D-N.Y.), would enact the “Helping Families Save Their Homes in Bankruptcy Act of 2007.” Section 203 of that proposed Act would amend 28 U.S.C. §1334 to authorize the court to disregard arbitration agreements in core proceedings in consumer bankruptcy cases. Here is the text of §203:

            Sec. 203. Resolving Disputes.

Section 1334 of title 28, United States Code, is amended by adding at the end the following: ‘‘Notwithstanding any agreement for arbitration that is subject to chapter 1 of title 9, in any core proceeding under §157(b) of this title involving an individual debtor whose debts are primarily consumer debts, the court may hear and determine the proceeding, and enter appropriate orders and judgments, in lieu of referral to arbitration.’’

Section 203 would change current law. “Though it has been argued arbitration of core bankruptcy issues inherently present[s] a conflict with the Bankruptcy Code, most courts have concluded a bankruptcy court has no discretion to refuse to enforce an arbitration agreement unless arbitration would seriously jeopardize the objectives of the Bankruptcy Code. The Second, Third, Fourth and Fifth Circuit Courts of Appeal, and the Ninth Circuit Bankruptcy Appellate Panel have all refused to apply a simple core versus non-core test in their search for a McMahon exception to the FAA’s mandate.” Cooley v. Wells Fargo Financial (In re Cooley), 362 B.R. 514, 519-20 (Bankr. N.D. Ala. 2007) (citations omitted); see also Michael D. Fielding, How To Avoid Arbitration in Bankruptcy: Six Arguments in Your Arsenal, 26 No. 6 Am. Bankr. Inst. J. 24, __ (August 2007) (“With respect to core claims, numerous courts have rejected the argument that a proceeding that is core in nature, standing alone, is a sufficient basis to allow the court, in its discretion, to refuse to enforce an arbitration provision. Rather, a court has discretion whether to compel arbitration on a matter involving a core proceeding if the arbitration would jeopardize and/or conflict with the purposes of the Bankruptcy Code.”) (citations omitted).

Three other bills have been introduced to permit modification of residential mortgages in chapter 13: S. 2133 (introduced by Sen. Specter (R-Pa.), H.R. 3609 (introduced by Rep. Miller (D-N.C.) for himself and several other House members), and H.R. 3778 (introduced by Rep. Chabot (R-Ohio). None of these three bills includes a provision dealing with arbitration. A chart prepared by the author comparing the provisions of all four of the bills is available on ABI’s web page at Additional information about each of the bills is available on the ABI’s home page,, under the “Legislative News” heading. No action has yet been taken on any of the bills except for H.R. 3609, which was forwarded to the full House Judiciary Committee on Oct. 4, 2007 by its Subcommittee on Commercial and Administrative Law (by a 5-4 vote); the full committee began markup of H.R. 3609 on Nov. 7, 2007 but has not yet completed that process.

Several bills also have been introduced in an attempt to reform home mortgage origination practices. H.R. 3915 (also introduced by Rep. Miller (D-N.C.)) would enact the “Mortgage Reform and Anti-Predatory Lending Act of 2007” (MRAPLA). MRAPLA would add a new §129B Truth in Lending Act (TILA), and §206 of MRAPLA would add subsections (f)-(k) to the new §129B. The new §129B(h) prohibits the inclusion of pre-dispute arbitration agreements in residential mortgages and home equity line of credit agreements:

No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer (other than a reverse mortgage) may include terms that require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.

MRAPLA, §206(h)(1). Post-dispute arbitration agreements would be permitted. See MRAPLA, §206(h)(2).

On Nov. 6, 2007, the House Financial Services Committee voted to approve MRAPLA and send it to the House floor, with some amendments. Additional amendments may be agreed upon before the bill is considered on the floor, which probably will occur on November 14 or 15. It does not appear that any of the amendments will affect MRAPLA’s arbitration provisions.