WASHINGTON (Legal Newsline) - The leaders of a Congressional subcommittee are urging the Consumer Financial Protection Bureau to include a safe harbor provision in its final set of rules prohibiting arbitration clauses that prevent class action lawsuits.
U.S. Reps. Randy Neugebauer, R-Texas, who chairs the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit, and William Lacy Clay Jr., D-Mo., the subcommittee’s ranking member, sent their letter to CFPB Director Richard Cordray Sept. 7.
Both asked the bureau to consider providing a safe harbor in its final rules that allows financial companies to retain class action waivers in their arbitration clauses. A safe harbor refers to a legal provision to reduce or eliminate liability in certain situations as long as certain conditions are met.
Class action waivers are sections of a contract that prevent someone from filing a class action lawsuit and can be found in many different types of contracts, including employment contracts.
Neugebauer and Clay said they are concerned the CFPB’s current proposal may result in decreased consumer access to alternative dispute forums, and therefore may “perpetuate the justice gap” for low-income and underbanked Americans.
The lawmakers want a provision that will preserve the use of arbitration as a “viable dispute resolution forum.”
“Many observers have concluded that a prohibition on class action waivers will result in financial institutions dissolving their consumer-friendly arbitration programs as they are forced to bear significantly increased exposure associated with class action litigation,” they wrote in their two-page letter.
The same conclusion was presented by several witnesses at a recent subcommittee hearing to examine the proposal, the two noted.
“Such an outcome would leave many American consumers seeking to remedy small dollar disputes without a viable forum for resolution,” Neugebauer and Clay wrote.
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. The proposal received nearly 13,000 comments by last month’s deadline.
Under the bureau’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.
Neugebauer and Clay suggested the safe harbor provision include adoption of mandatory, pro-consumer features of arbitration programs.
“For example, the Bureau may look to the best practices required by the American Arbitration Association and examine which companies, even those in other sectors, have best-in-class arbitration programs,” they wrote.
The safe harbor also could require adoption of model arbitration agreements developed by the CFPB that are in “plain English” and consumer-friendly, the lawmakers suggested.
“Providing a safe harbor would allow the Bureau to improve arbitration programs in a way that preserves consumer access to a fair, transparent, cost-effective, and timely resolution of their disputes,” Neugebauer and Clay wrote.
The Congressmen noted that despite the fact the CFPB’s arbitration study found that arbitration is “generally faster, more convenient, and results in better outcomes for consumers than in-court litigation,” the bureau’s proposed arbitration rule does the opposite -- seeking to expand the use of class actions by prohibiting class action waivers in arbitration agreements.
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.
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., argues the proposed rules offer plenty of benefits for consumers.
Not only will they 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 contends.
The proposed rules also would make the individual arbitration process, itself, more transparent, it argues.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.