CFPB Draws Line in Sand Regarding Arbitration Clauses (Oct. 7, 2015)
Prior to today’s field hearing in Denver, the CFPB announced it’s considering proposing rules that would restrict consumer financial companies from using certain types of arbitration clauses that block consumers from forming class action lawsuits to obtain compensation. Under one proposal, the bureau would explicitly provide that the arbitration agreement would be inapplicable to cases filed in court on behalf of a class unless class certification is denied or the class claims are dismissed.
The bureau described most arbitration clauses as giving companies a “free pass” to sidestep the legal system, avoid big refunds and continue to pursue profitable practices that may violate the law and harm consumers. The proposals under consideration would apply to most consumer financial products and services that the bureau oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans and installment loans.
The CFPB in March released its 728-page “Arbitration Study: Report to Congress 2015” report, which was three years in the making. The report was a requirement of the Dodd-Frank Act to provide input and examines how arbitration clauses are used in certain consumer finance markets. The study, which a subsequent Mercatus report criticized as flawed, determined that arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions.
“Although we are not proposing to prohibit the use of pre-dispute arbitration clauses, we will continue to monitor the effects of such clauses on the resolution of individual disputes,” CFPB Director Richard Cordray said in his prepared remarks. “To enable us to do so, our proposals would require companies to send to the bureau all filings made by or against them in consumer financial arbitration disputes and any decisions that stem from those filings. By developing comprehensive data on these matters, over time we will be able to refine our evaluation of how such proceedings may affect consumer protection, if at all.” The bureau is considering publishing this information “for all to see” to facilitate broader thinking by researchers and so the data can be analyzed by the public.
The proposals the CFPB are considering, according to Cordray, would produce three general benefits: consumers would have the opportunity to get their day in court; they would deter wrongdoing on a broader scale; and possibly making arbitration filings and awards public would “bring the arbitration of individual disputes into the sunlight of public scrutiny.”
“While the NBPCA is still analyzing the CFPB arbitration proposals, we are concerned that the bureau is expressly promoting class action litigation as the preferred means to resolve consumer disputes,” Brad Fauss, NBPCA president and CEO, tells Paybefore. “The likely outcome of more class action litigation will be an increase in costs that will ultimately be passed on to consumers.”
The bureau has published an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback from small industry stakeholders, which would be the first step in the process of a potential rulemaking. The CFPB will continue to seek input from the public, consumer groups, industry and other stakeholders before continuing with the rulemaking process. When the bureau issues proposed regulations, the public will be able to submit written comments before final regulations are issued.
The CFPB has provided a list of questions on which the bureau will seek input from the small business representatives providing feedback to the Small Business Review Panel and a fact sheet summarizing the Small Business Review Panel process.