Consumer Financial Protection Bureau Proposes Prohibiting Mandatory Arbitration Clauses Denying Class Action Lawsuits

 

The Consumer Financial Protection Bureau (“CFPB”) announced on May 5, 2016 that it is seeking comments on proposed Rules that would prohibit companies from putting mandatory arbitration clauses in new contracts.  

These clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for cases brought in small claims court.  Where the clauses exist, either side can generally block lawsuits from proceeding.  They also typically bar consumers from bringing group claims through the arbitration process.  As a result, no matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company, according to the CFPB.

Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets.  For consumer protection and consistent with the study, Congress also gave the CFPB the power to issue regulations that are in the public interest.

Released in March 2015, the CFPB’s study showed that very few consumers ever bring–or think about bringing–individual actions against their financial service providers either in court or in arbitration.  The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies.  According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct.  It also showed that at least 160 million class members were eligible for relief over the five-year period studied.  Those settlements totaled $2.7 billion in cash, in-kind relief, and attorneys’ fees and expenses.  The CFPB noted that these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior.  However, where mandatory arbitration clauses are in place, companies are able to use those clauses to block class actions.

The proposed Rules would open up the legal system to consumers so they could file a class action or join a class action when someone else files it.  Under the proposal, companies would still be able to include arbitration clauses in their contracts.  However, for contracts subject to the CFPB proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court.  Instead, the proposed Rules would provide the specific language that companies must use.

They would also require companies with arbitration clauses to submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases.  This would allow the Bureau to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers.  

The proposed Rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB.  The CFPB would also collect correspondence from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct.  The collection of these materials would enable the CFPB to better understand and monitor arbitration.  It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair and allow the public to monitor the arbitration process as well. 

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” said CFPB Director Richard Cordray. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

The proposed rules which the CFPB is seeking comment on would apply to most consumer financial products and services that the CFPB oversees, including those related to the core consumer financial markets that involve lending money, storing money, and moving or exchanging money. Congress already prohibited arbitration agreements in the largest market that the Bureau oversees–the residential mortgage market.

In October 2015, the Bureau published an outline of the proposals under consideration and convened a Small Business Review Panel to gather feedback from small companies. In addition to consulting with small business representatives, the Bureau sought input from the public, consumer groups, industry, and other stakeholders before continuing with the rulemaking.  That process concluded in December 2015 with a written report to the Bureau’s director, which is available via the hyperlink below. 

The public will be invited to comment on these proposed regulations when they are published in the Federal Register.  

Meanwhile, the complete text of the proposal is available here.  

The Small Business Review Panel report is available here.

The March 2015 CFPB report on arbitration is available here.   

 

 

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