CFPB Releases Proposed Rule on Arbitration Clauses
The CFPB today released a proposed rule that would place restrictions on arbitration clauses in financial services contracts. Under the proposal, unveiled this morning before a CFPB field hearing in Albuquerque, N.M, arbitration clauses would not be banned but would have to state explicitly that the clause cannot be used to stop a consumer from participating in a class action lawsuit. The specific language of the disclaimer would be provided by the CFPB. The proposed rule also would require companies with arbitration clauses to submit to the CFPB claims, awards and other documentation related to arbitration cases, enabling the bureau to “ensure that the arbitration process is fair for consumers,” the CFPB said. That information could then be published to the public by the agency. The proposed rule would apply to most consumer financial products and services that the bureau oversees, including credit cards, checking and deposit accounts, and prepaid cards.
“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,” said CFPB Director Richard Cordray. “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.”
The CFPB has long had its sights set on mandatory arbitration clauses that block consumers from forming class action lawsuits to obtain compensation—instead requiring that disputes be resolved by appointed individual arbitrators. The CFPB has said that such clauses give companies a “free pass” to sidestep the legal system and continue to pursue practices that may violate the law and harm consumers. During a field hearing in October 2015 in Denver, the CFPB announced it was considering proposing rules that would ban arbitration clauses that block class actions. The decision was based, in part, on a March 2015 CFPB study that found that “very few” consumers bring individual action against financial services providers, and concluded that class actions provide a more effective means of gaining financial relief. However, that study was later criticized for its methodology by the Mercatus Center, which claimed it lacked much of the key information necessary to fully evaluate the relative benefits of arbitration and class actions in gaining relief for consumers.
Many in the financial services industry have claimed that the study actually shows that arbitration is a faster, less expensive and more effective way for consumers to resolve disputes. Of the 562 class action studied by the CFPB, the average cash settlement was $32.35 per consumer, and class action litigation took an average of two or more years. In contrast, the average amount received by consumers who prevailed in arbitration was $5,389, with an average arbitration timeframe of two to seven months.
“Arbitration is an important tool to facilitate dispute resolution and helps both consumers and banks avoid lengthy court proceedings and costly legal fees,” said Brad Fauss, CEO and president, Network Branded Prepaid Card Association. “The CFPB proposed arbitration rule is another bureaucratic government solution in search of a problem that will ultimately harm consumers and solely benefit trial lawyers.”
The CFPB is soliciting input on the proposed rule from the industry and public, with comments due within 90 days of the proposal being published in the Federal Register. Comments can be sent via email to [email protected] (include Docket No. CFPB-2016-0020 or RIN 3170-AA51 in the subject line of the email), online at www.regulations.gov, or by mail or hand delivery to: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street, NW, Washington, D.C. 20552.