Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: May 25, 2012

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Arbitration is a means of conflict dispute that is present in many of the most common mortgage loan purchase agreements. The arbitration clause is signed by borrowers when financing money for the purchase of a home, and again is often signed by borrowers when they actually agree to buy a home.

When considering a mortgage loan, keep an eye out for arbitration clauses, because when the dotted line of an arbitration clause is signed, borrowers waive some of their constitutional rights.

Arbitration Defined

There are three types of common dispute resolution types that take place in our society today: court rulings, mediation, and arbitration.

Most of us are familiar with court rulings, in which two parties present their case to a judge, and the judge makes a ruling based on our federal or state laws.

Mediation and arbitration may be slightly more foreign.

Mediation occurs when two parties agree to sit down and talk their differences out, but with an unbiased third party present to “mediate” the conversation. Once the two parties come to an agreement, they pay the mediator for his or her time and service, and the dispute is resolved.

Arbitration, however, mixes those two concepts. Two parties meet not before a judge, but an arbitrator. The arbitrator then facilitates conversation and acts as both judge and jury, ruling in favor of whichever party he or she deems the victor.

So What’s the Problem?

The problem with arbitration is that it gives absolute judicial power to an individual who may or may not be qualified to make such rulings. Additionally, most arbitration clauses—particularly those found in mortgage loan contracts and purchase agreements—prevent disputers from pursuing a court ruling.

By signing an arbitration clause, borrowers effectively relieve themselves of their sixth amendment right: “the right to speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed.”

What’s more is many companies insist on only doing business with those who agree to take any potential dispute to arbitration so that they can avoid the court system. Many claim this move is to avoid the high costs of our judicial process, but others believe the motive is more sinister.

Some speculate that some mortgage loan lenders have arbitrators in their pocket, and thus guarantee a more favorable ruling than a completely unbiased judge may award. Others believe that arbitration is a means for large corporations to avoid the media’s attention when a dispute arises between themselves and a client.

Regardless of the motive, some mortgage loan borrowers feel victimized. This victimization has become so prevalent that the Consumer Financial Protection Bureau (CFPB) has launched a public inquiry into arbitration clauses. The CFPB hopes to protect those with mortgage loans (and other types of financing) from unfair, impartial, and (possibly) unconstitutional rulings.