Jessica Karmasek Aug. 23, 2016, 11:14am


WASHINGTON (Legal Newsline) - Nearly 13,000 comments have been received by the Consumer Financial Protection Bureau on its proposed set of rules prohibiting arbitration clauses that prevent class action lawsuits.

The CFPB, an independent agency of the federal government responsible for consumer protection in the financial sector, published its proposal in the Federal Register on May 24, with a 90-day comment period. All comments were due no later than Monday.

Special interest groups, consumer lawyers and even citizens chimed in on the proposed set of rules. A total of 12,744 comments were received as of 11:59 p.m. Monday, according to the webpage set up to receive input on the proposal.

One commenter, Lois Chafin, said, “Please, lawyers get more than enough in most cases.”

Another commenter, Brandi Rouse, wrote, “Trial lawyers should not be making a fortune on the backs of the American people.”

Under the CFPB’s proposal, companies would be prohibited from putting mandatory arbitration clauses in new contracts.

Many contracts for consumer financial products and services contain such clauses, which are a way to resolve disputes outside the court system.

Companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the 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.

The proposal would provide the specific language that companies must use.

The proposal also would 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 bureau also is considering publishing information it would collect in some form, so the public can monitor the arbitration process as well.

The National Association of Insurance Commissioners, which filed comments on the proposed set of rules earlier this month, argues state law remains the “appropriate vehicle” for any restrictions -- including the use of arbitration agreements -- related to the business of insurance.

NAIC said it is concerned, in particular, with the proposal’s application to the extensions of credit by providers of whole life insurance policies.

The proposed rule will apply to such companies “to the extent that these companies are ECOA creditors and that activity is not the ‘business of insurance’ under the Dodd-Frank section 1002(15)(C)(i) and 1002(3) and arbitration agreements are used for such policy loans.”

“We appreciate that the bureau appears to be attempting to separate out the ‘business of insurance’ from the scope of the rule, but as a function of state law and regulation, policy loans are the ‘business of insurance’ and therefore should be fully outside the scope of this proposal,” NAIC President John M. Huff wrote for the association.

The National Association of Federal Credit Unions, in its comments filed this month, said it, too, has concerns about the proposal, including: the conclusions derived from the CFPB’s final arbitration study used in the proposal; the potential unintended consequences this proposed rule may have on credit unions and their members; and the costs to providers and consumers.

Ann Kossachev, regulatory affairs counsel for NAFCU, argues in the association’s comments that credit unions should be exempt from any arbitration rulemaking.

“Since its inception, the CFPB has taken a data-driven approach to its rulemaking and states it is doing so here. Yet, NAFCU is concerned that the CFPB’s study is flawed and does not support conclusions reached in the proposed rule,” Kossachev wrote. “NAFCU believes the study is incomplete and presents a skewed picture of class action lawsuits compared to arbitration. In addition, it does not appear that that the bureau engaged in a proper cost-benefit analysis.”

The CFPB first launched a public inquiry on arbitration clauses in April 2012 and released preliminary research in December 2013.

In all, the bureau analyzed nearly 850 consumer finance agreements to examine the prevalence of arbitration clauses and their terms.

The CFPB also reviewed more than 1,800 consumer finance arbitration disputes filed over a period of three years and more than 3,400 individual federal court lawsuits. It also looked at 42,000 credit card cases filed in selected small claims court in 2012.

The bureau supplemented this research by assembling and analyzing a set of roughly 420 consumer financial class action settlements in federal courts over a period of five years and more than 1,100 state and federal public enforcement actions in the consumer finance area.

It also conducted a national survey of 1,000 consumers with credit cards concerning their knowledge and understanding of arbitration and other dispute resolution mechanisms.

Then, in March 2015, the CFPB released the results of its study, which indicated that such agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions.

The report found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements.

The bureau’s report also found that more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7 percent of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court.

NAFCU argues the CFPB’s study does not analyze data for arbitration settlements because the data was unavailable, but then compares arbitration awards with class action settlements.

“Such a comparison conflates two different types of data and exaggerates the benefits of class action while downplaying the advantages of arbitration,” Kossachev wrote.

Trial lawyers continue to back the rules.

An unnamed, self-described “consumer lawyer” said he has turned down many clients -- more than 100 in 10 years -- that had good liability cases because of forced arbitration agreements.

“The few cases I have handled through arbitration ALWAYS come out to the benefit of the company sued,” the lawyer wrote, before explaining how one of his clients was defrauded by a bank on a car loan and forced by a judge to file for arbitration.

“My client paid an additional $1,200 to the bank that was not owed before realizing the bank had charged more than the loan was worth, in addition to sending him dunning letters and negatively reporting the account on his credit reports. We showed all this evidence to the arbitrator. The arbitrator ruled for my client awarding him $1,200 and no attorney fees or other expenses.

“But for the arbitration clause, this case would have been worth $5,000 or more, if we could have tried it before a jury.”

The lawyer noted that he had more than 40 hours in the case and his customary fee is $250/hour. He said he took the case on a contingency basis of 40 percent.

“This meant I took almost half of this poor man’s recovery or I did not get paid at all, not to mention his and my costs,” he wrote in his comments. “I did not take a fee or charge the client expenses in the case.

“However, I will not take any more of these cases going forward. I have a business to run and a family to feed, too. This is an absurd result, albeit a common result for other consumer attorneys in my region.”

The lawyer argues the CFPB should ban forced arbitration in any consumer contract, whether it be to purchase a car, cell phone, cable television, satellite television, an appliance, or to obtain a checking account or credit card.

“This will help consumers by ensuring the companies offering these goods and services make sure they are not illegally overcharging consumers, cramming their accounts or providing faulty products,” he wrote. “At this time, companies use contracts of adhesion to take advantage of consumers with impunity.”

Sarah Morton, an attorney from Virginia, wrote in her comments that she supports the bureau’s proposal, saying access to the court system is an “important value” in the United States.

“Further, the option to participate in a class action provides a cost-effective way for consumers to investigate and pursue claims,” she wrote.

“Under the typical arbitration clause, the consumer must take any dispute he or she has before an arbitrator, rather than having the option to go to court. In many cases the arbitrator is selected by the bank. In most cases the process is not open to the public, and the decision itself has limited or no exposure to judicial review.”

Morton said the “opportunity for public oversight” of the process is a key element of the country’s judicial system.

“Public proceedings and decisions provides understanding, predictability, and accountability,” she wrote. “These benefits to our nation as a whole are lost when an entire category of cases are shifted into mandatory arbitration.”

The CFPB, which has jurisdiction over banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies operating in the U.S., agrees there are plenty of benefits for consumers.

Not only will consumers get their day in court, but companies will be given incentive to comply with the law in an effort to avoid group lawsuits, the bureau argues.

The proposed rules also would make the individual arbitration process, itself, more transparent, it contends.

But some argue the proposal still faces a lengthy, uphill battle -- one that could potentially stretch beyond Richard Cordray’s five-year appointment as CFPB director, which ends in 2018.

“Assuming (Cordray) is even still director by the time they get around to finalizing the rule,” Alan Kaplinsky, leader of the Consumer Financial Services Group for the firm Ballard Spahr LLP, told Legal Newsline in June. “He may or may not be.”

He continued, “It’s not going to be finalized, I don’t think, until sometime next year. And then after, there will undoubtedly be a legal challenge in court.”

Kaplinsky, an attorney who pioneered the use of pre-dispute arbitration provisions in consumer contracts, has been a vocal opponent of the CFPB’s proposed set of rules even before they were officially released by the bureau.

In November, Kaplinsky took issue with a New York Times article that alleged binding arbitration is being used by Wall Street and corporate America to hurt American consumers.

Kaplinsky, who was interviewed numerous times over the span of months by the Times, argued the newspaper omitted key information he provided its reporters regarding class action litigation and the CFPB’s study.

He argues class actions only benefit class action lawyers.

Meanwhile, the U.S. House of Representatives, by a vote of 236-181, recently rejected an amendment to H.R. 5485, the Financial Services and General Government Appropriations Act. The act covers appropriations for the fiscal year ending Sept. 30, 2017.

The amendment, offered by Democrats, including U.S. Rep. Keith Ellison of Minnesota, would have removed a provision in the underlying bill requiring the CFPB to study the costs and benefits to consumers of eliminating arbitration clauses in consumer contracts.

Three Republicans voted for the amendment, while two Democrats voted against it.

The American Bankers Association had pushed House members to reject the amendment, saying the cost-benefit analysis is a “critical issue” and one that has been “overlooked” by the bureau.

“The Bureau’s initial study confirmed the basic conclusion of decades of prior research: consumers fare as well, and often better in arbitration than they do in court,” the bankers group wrote in its July 6 letter to House members. “This is hardly ample justification for regulating arbitration out of existence as has been proposed.”

The full House approved the appropriations bill last month by a vote of 239-185, including various provisions intended to curb the CFPB’s authority.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

Organizations in this Story

Consumer Financial Protection Bureau
1700 G St NW
Washington, DC 20552

U.S. House of Representatives

Washington, DC 20515

Ballard Spahr, LLP
1735 Market St
Philadelphia, PA 19103

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