WASHINGTON (Legal Newsline) - When the Consumer Financial Protection Bureau announced in October it is considering proposing a rule that bans the arbitration clauses that prevent class action lawsuits, consumer groups and trial lawyers instantly applauded the move, while industry groups and some legal experts questioned the bureau’s rationale.
But the CFPB, an independent agency of the federal government responsible for consumer protection in the financial sector, insists that it is not considering a proposal to prohibit arbitration agreements completely.
Many contracts for consumer financial products and services contain such clauses, which are a way to resolve disputes outside the court system.
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. -- points out that it is just the first step in the process of a potential rulemaking on the issue.
The bureau -- created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in 2010 in response to the financial crisis of 2007-08 and the subsequent recession -- says it is not announcing the rules yet; rather, it announced last month those proposals under consideration.
In particular, the CFPB is weighing two primary proposals for the arbitration rulemaking.
First, the bureau is considering a proposal that would prohibit the application of pre-dispute arbitration agreements to class litigation in court. In other words, the proposal would foreclose consumer financial companies from using such agreements to avoid or seek dismissal of a class proceeding before a court ever has an opportunity to review the merits of the case.
Second, the CFPB is considering a proposal that would require consumer financial companies that use arbitration agreements to submit all claims filed and awards issued in arbitration proceedings involving consumers and the company to the bureau.
Collecting these claims and awards would ensure that the bureau is aware of any practices harmful to consumers develop in arbitration in the future, it claims. The bureau also is mulling whether it should publish claims and awards in redacted form on its website.
The CFPB contends the benefits of the proposals include a “day in court” for consumers; a “deterrence effect,” basically incentivizing companies to comply with the law to avoid lawsuits; and increased transparency by requiring companies that use arbitration clauses to submit the claims and awards to the bureau.
“When consumers can band together to seek relief in a group lawsuit, individual can be compensated for relatively small or hidden harms, and companies are incentivized to stop violating the law in ways that harm consumers,” Eric Goldberg, senior counsel with the CFPB’s Office of Regulations, said in a statement to Legal Newsline.
“When companies can block class actions with arbitration clauses buried in consumers’ contracts, it allows them to avoid accountability to harmed consumers and gives them a free pass to continue to pursue profitable practices that may violate the law.”
Goldberg added, “Without class actions, millions of consumers who do not individually seek to resolve their claims against the company for wrongdoing may never obtain the relief they deserve.”
But how did a government agency ultimately come to the decision to call for a proposal that some argue goes too far?
First, the Dodd-Frank Act required that the CFPB study arbitration clauses in consumer financial product contracts and provide a report to Congress of its findings.
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, 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.
“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” CFPB Director Richard Cordray said at the time.
In particular, the CFPB looked at arbitration clauses in six different consumer finance markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless contracts.
The bureau’s study found, by the numbers:
- 53 percent: The market share of credit card issuers that include arbitration clauses;
- 44 percent: While fewer than 8 percent of banks and credit unions include arbitration clauses in their checking account agreements, those who do represent 44 percent of insured deposits;
- 92 percent: The percentage of prepaid card agreements the CFPB obtained that are subject to arbitration clauses;
- 86 percent: In the private student loan market, 86 percent of the largest lenders include arbitration clauses in their contracts;
- 99 percent: The bureau was able to obtain data on payday loan agreements in California and Texas. In those states, more than 99 percent of storefront locations include arbitration clauses in their agreements; and
- 88 percent: Among mobile wireless providers who authorize third parties to charge consumers for services, 88 percent of the largest carriers include arbitration clauses. Those providers cover more than 99 percent of the market.
Before undertaking the study, the CFPB published a request for information and received comments on the scope, methods and data sources for the study. It received 60 comments -- many of which were specifically addressed and referred to in the study, the bureau noted.
It also met with a variety of stakeholders -- consumer groups, industry groups and Congressional staff -- to discuss the study’s process and, later, to get feedback regarding the preliminary results.
Various consumer and industry groups interviewed by Legal Newsline confirmed they were involved in such discussions and did submit feedback.
The bureau also received written comments from some stakeholders representing class action lawyers.
The American Association for Justice, formerly the Association of Trial Lawyers of America, considered an advocacy and lobbying organization for plaintiffs’ lawyers, declined to be interviewed but pointed to statements it made in March, June and October regarding the issue.
On the CFPB’s study:
“For too long, Wall Street has been able to cheat, steal from, and harass American consumers without ever being held accountable by the very people who keep them in business -- and completely evade crucial consumer protection laws that are designed to ensure even the most powerful financial institutions follow the rules,” then-AAJ President Lisa Blue said in March.
“By hiding forced arbitration clauses in the fine print, Wall Street has been able to keep this abusive practice out of the public eye. Now, nearly every American has had their rights eliminated by forced arbitration when they engage in ordinary business such as use credit cards, buy a cell phone, visit websites, start a new job, enroll their children in camps, and even admit a loved one into a nursing home.”
Since making its announcement Oct. 7, the CFPB has held a panel outreach meeting with small entity representatives in Washington, soliciting their input on the potential impact of the proposals under consideration on small businesses.
It also is soliciting additional feedback on the proposals under consideration from stakeholders other than small businesses, including industry groups, consumer groups, and other federal and state regulators and enforcement authorities.
After completing its panel report -- most likely sometime next month -- the CFPB will decide whether it’s appropriate to proceed with rulemaking activity.
If a rule is indeed proposed, all small businesses and organizations will be given the opportunity to submit formal written comments during the public comment period, which is generally 30 to 90 days.
According to the bureau’s current proposals, it anticipates -- if adopted -- the proposals would become operative no earlier than 180 days after the effective date of a final rule, which most likely would be set for 30 days after the rule is published.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.