Last reviewed: 7 October 2026
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Mortgage terms that Regulation Z prohibits, explained
Some terms cannot lawfully appear in a loan secured by a home, however a contract is worded. This page sets out three prohibitions and one counseling rule in Regulation Z, in the regulation’s own words.
What this term means: Arbitration is, in the CFPB’s words, “a way to address disputes outside the court system,” where an arbitrator listens to each side and decides.[1] Credit insurance is defined in the regulation to include credit life, credit disability, credit unemployment and credit property insurance, other accident, loss-of-income, life or health insurance, and payments for any debt cancellation or suspension agreement or contract.[2]
Four rules in one section of Regulation Z
All four sit in 12 CFR § 1026.36. Paragraphs (h) and (i) apply to closed-end credit secured by a dwelling and to a home equity line of credit secured by the consumer’s principal dwelling; they do not apply to a loan secured by an interest in a timeshare plan. Paragraph (k) applies only to closed-end transactions and excludes reverse mortgages subject to § 1026.33 and timeshare plans. The table sets out each rule as the regulation words it.[2]
| Provision | What § 1026.36 says |
|---|---|
| (h)(1) Arbitration | A contract or other agreement for a consumer credit transaction secured by a dwelling, including a home equity line of credit secured by the consumer’s principal dwelling, “may not include terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction.”[2] |
| (h)(2) Court claims under federal law | Such a contract or agreement “may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law.”[2] |
| After a dispute arises | Neither (h)(1) nor (h)(2) limits a consumer and creditor or any assignee from agreeing, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.[2] |
| (i)(1) Financing credit insurance | A creditor “may not finance, directly or indirectly, any premiums or fees for credit insurance” in connection with a consumer credit transaction secured by a dwelling, including a home equity line of credit secured by the consumer’s principal dwelling. The prohibition does not apply to credit insurance for which premiums or fees are calculated and paid in full on a monthly basis.[2] |
| (i)(2) Key definitions | A creditor finances premiums or fees if it gives the consumer the right to defer payment of a premium or fee beyond the monthly period in which it is due. Premiums or fees are calculated on a monthly basis if they are determined mathematically by multiplying a rate by the actual monthly outstanding balance. The definition of credit insurance excludes credit unemployment insurance only where the premiums are reasonable, the creditor receives no direct or indirect compensation in connection with them, and they are paid under a separate insurance contract and not to an affiliate of the creditor.[2] |
| (k) Negative amortization counseling | A creditor shall not extend credit to a first-time borrower in a closed-end transaction secured by a dwelling that may result in negative amortization unless it receives documentation that the consumer obtained homeownership counseling from a counseling organization or counselor certified or approved by HUD. The same paragraph bars the creditor from steering the consumer to a particular counselor or organization. Reverse mortgages subject to § 1026.33 and timeshare-plan transactions are excluded.[2] |
What the CFPB says in plain language
- Mortgage lenders “would sometimes include ‘mandatory arbitration clauses’ in mortgage agreements,” which made you agree to resolve certain disputes in arbitration rather than in court. The CFPB says lenders “are no longer allowed to include” them and that you “can’t be required to accept mandatory arbitration.”[1]
- The CFPB says you can agree to resolve an issue through arbitration “if you think that’s a better way of resolving the dispute,” and that some protections generally available in court, such as the right to appeal, may not be available in arbitration.[1]
Terms of art to know
- Negative amortization: in the regulation, “a payment schedule with regular periodic payments that cause the principal balance to increase.”[2]
- First-time borrower: in this paragraph, a consumer who has not previously received a closed-end credit transaction or open-end credit plan secured by a dwelling.[2]
Our guide to interest-only, balloon and negative-amortization features explains the loan features themselves.
How to verify this yourself
Read § 1026.36(h), (i) and (k) in the eCFR (reference 2) and the CFPB page (reference 1). Your own note and loan agreement are the documents to read for the terms that apply to you. To check the person you are working with, use our guide to verifying a loan officer’s NMLS license. Our published standard covers how we check loan originators, and the Register shows that method; neither reviews a lender’s or servicer’s handling of your loan.
What this page does not cover
This page covers only paragraphs (h), (i) and (k) of § 1026.36. It does not cover the other paragraphs of that section (such as originator compensation, covered in our compensation guide), how a court treats a particular clause, or what to do about a clause in a specific contract. The CFPB arbitration page was last reviewed in September 2024. This page is general information, not legal advice, and it does not compare lenders, loan products or rates. It was last reviewed 7 October 2026.
Your next step
A written explanation from the lender, or a copy of the clause itself, would show whether one of these terms appears in your documents. Then return to the Mortgage help library for related guides.