CFPB proposes prohibiting mandatory arbitration clauses

By Jessica Karmasek | May 5, 2016

ALBUQUERQUE, N.M. (Legal Newsline) - The Consumer Financial Protection Bureau, as predicted by some industry professionals, has released a set of proposed rules that would prohibit mandatory arbitration clauses that prevent class action lawsuits.

The CFPB, an independent agency of the federal government responsible for consumer protection in the financial sector, held a field hearing on the highly-anticipated arbitration rules in Albuquerque Thursday. The field hearing is the third such hearing it has held on arbitration. The first was held last March and the second was held in October.

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

“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,” CFPB Director Richard Cordray said Thursday. “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.”

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

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 American Association for Justice, formerly the Association of Trial Lawyers of America, said in a statement that the CFPB’s proposed rules are a step in the right direction.

“Forced arbitration allows Wall Street to evade vital consumer protection laws designed to ensure that even the most powerful financial institutions follow the rules. The CFPB’s proposal to restore the right of Americans to join together to hold Wall Street accountable is a significant step forward, but we urge the bureau to establish a strong final rule that restores the right of all Americans, including those seeking justice on an individual basis, to choose whether and how to enforce their rights,” AAJ President Larry Tawwater said.

“The CFPB’s exhaustive 728-page study makes it clear that the vast majority of Americans are unknowingly tricked into signing away their rights only to be forced into a rigged system if they’ve been cheated by Wall Street.

“While we applaud today’s significant action, we urge the CFPB to fully empower consumers to enforce all their rights to hold financial institutions accountable, both individually and as a group. Only then will consumers have the full protection they are guaranteed by the Constitution.”

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.

Alliance for Justice, a liberal judicial watchdog group, called the proposed rules an “enormous step forward.”

“For far too long, large corporations have abused American consumers by forcing them to resolve disputes through the grossly unfair process of forced arbitration and by barring class action lawsuits, thereby insulating corporate misbehavior from the corrective force of the legal system,” President Nan Aron said in a statement. “The proposed rule by the Consumer Financial Protection Bureau eliminating the ban on class actions within the financial industry is an enormous step forward toward restoring the right to band together with others who have been harmed to redress grievances through the courts. Importantly, it also revives one of the most effective mechanisms for reining in systemic misbehavior and for ensuring accountability among banks and lending institutions.”

She continued, “Although the CFPB rule deals only with class action bans in the financial industry, it remains a constructive first step in countering the insidious forced arbitration scheme, and we -- and all consumers -- look forward to its implementation.”

While consumer groups and trial lawyers are backing the rules, industry groups and legal experts continue to question the bureau’s rationale.

Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, and David Hirschmann, president and CEO of the U.S. Chamber Center for Capital Markets Competitiveness, called the CFPB’s proposed rules a “gift” to plaintiffs’ lawyers.

The Chamber’s ILR owns Legal Newsline.

“In the 50 years since the advent of modern day class action lawsuits, plaintiffs’ lawyers have made millions of dollars in fees from these suits while consumers often receive little benefit,” Rickard and Hirschmann said in a joint statement. “With this rule, the CFPB has doubled down on that trend.”

They pointed to the CFPB’s own study, which concludes that arbitration empowers consumers to resolve disputes easily and quickly on their own.

“The proposed rule is a wolf in sheep’s clothing,” they said. “The CFPB’s rule will have the practical effect of eliminating arbitration for most consumers. Now the agency designed to protect consumers is proposing a rule that will end up hurting them.”

They contend that eliminating arbitration has been a goal of plaintiffs’ lawyers for years.

“Unable to accomplish this through legislation, they have enlisted the CFPB to do it through regulation,” Rickard and Hirschmann said.

“The CFPB should go back to the drawing board. Its mission is to protect consumers, not enrich trial lawyers.”

But the bureau, 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., argues 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 CFPB argues.

Not to mention, the proposed rules would make the individual arbitration process, itself, more transparent, it contends.

The public is invited to comment on the proposed rules when they are published in the Federal Register. Written comments will be carefully considered before final regulations are issued, according to the bureau.

To view the proposal, click here.

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

Want to get notified whenever we write about any of these organizations ?

Sign-up Next time we write about any of these organizations, we'll email you a link to the story. You may edit your settings or unsubscribe at any time.

Organizations in this Story

American Association for Justice Consumer Financial Protection Bureau U.S. Chamber Institute for Legal Reform (ILR)

More News

The Record Network