Bloomberg Law
May 5, 2016, 11:43 PM

CFPB Proposes Mandatory Arbitration Clause Rule

Bloomberg Law - Staff Reports

By Jeff Bater, Bloomberg BNA

Banks and other financial companies could no longer use mandatory arbitration clauses to prevent class-action lawsuits under a proposed rule released May 5 by the Consumer Financial Protection Bureau (CFPB).

Business groups immediately criticized the proposal as a “gift” to plaintiffs’ lawyers they say could result in an explosion in litigation. The long-awaited plan was expected by the industry following years of study by the bureau, which is giving stakeholders 90 days to comment on the proposal.

The rule, which leaves room for mandatory arbitration by consumers pursuing claims individually, would apply to most consumer financial products and services that the CFPB oversees, including those related to the core consumer financial markets that involve lending money, storing money, and moving or exchanging money.

“Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB Director Richard Cordray said in a statement. “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.”

‘Contract Gotchas.’

Mandatory arbitration clauses in contracts allow a company to block class-action litigation. The bureau, in a news release, referred to “contract gotchas” in consumer financial products such as credit cards and bank accounts — widely used clauses that leave consumers with no choice but to seek relief on their own, usually over small sums.

The Dodd-Frank law required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets.

Congress also gave the bureau the power to issue regulations. The consumer watchdog bureau, in tandem with its announcement of the proposal, scheduled a field hearing for May 5 in Albuquerque, N.M., on arbitration, with remarks by Cordray and a panel discussion with industry stakeholders and consumer groups.

Explicit Language

The regulator said its proposal would open the legal system to consumers so they could file a class action or join a class action when someone else files it.

“Under the proposal, companies would still be able to include arbitration clauses in their contracts,” the CFPB said.

“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 CFPB proposal would also require companies with arbitration clauses to submit to the CFPB claims, awards and certain related materials that are filed in arbitration cases.

The agency said it is considering publishing information it would collect in some form so the public can monitor the arbitration process.

Litigation Explosion

Walter Zalenski, a partner at BuckleySandler, said in an e-mailed comment that over time, the possibility of a new litigation explosion is real if a CFPB class-action waiver ban is adopted.

“Consider the fact that, during the late 1970s, more than 2,000 Truth in Lending cases were filed in the federal courts each year,” Zalenski said. “Since then, the consumer financial services market has expanded dramatically, and so too has the regulatory burden of consumer financial protection laws.”

Win for Lawyers?

James Copland, director of legal policy at the Manhattan Institute think tank, said the only beneficiaries of the rule “are the trial lawyers who funnel campaign cash to politicians like Richard Cordray, the Obama administration’s CFPB director.”

And a U.S. Chamber of Commerce statement said the CFPB “is proposing to give the biggest gift to plaintiffs’ lawyers in a half century.”

“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,” a joint statement from U.S. Chamber Institute for Legal Reform (ILR) President Lisa A. Rickard and U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC) President David Hirschmann said. “With this rule, the CFPB doubles down on that trend.”

Banking industry groups point out that the CFPB study found that members of class-action suits don’t fare well, compared with consumers using arbitration. In a fact sheet, the Consumer Bankers Association said that according to bureau research, a consumer recovers on average $5,389 when using arbitration. In contrast, when participating in a class-action suit, a consumer recovers $32.35.

Basic Rights

The Center for Progressive Reform (CPR), a nonprofit research group, issued a paper May 4 saying that at least 53 percent of regular credit card contracts examined contained forced arbitration clauses. The research showed that financial products frequently sold to “vulnerable populations,” including low-income families and students, had even higher rates: 92 percent of prepaid credit card agreements contained the clauses, and 86 percent of private student loan contracts required arbitration to settle disputes.

“Using financial services like credit cards and loans should not mean giving up basic legal rights,” said Martha McCluskey, a CPR scholar who helped write the paper. “What most Americans don’t realize is that many of these services come with potentially harmful strings attached, which they’re forced to accept in order to pay their bills and finance their education.”

‘Get-Out-of-Jail-Free Card.’

Lauren Saunders, associate director of the National Consumer Law Center, called forced arbitration a “get-out-of-jail-free card” that lets banks, payday lenders and debt relief scammers avoid accountability when they violate the law.

“Forced arbitration and class action bans force consumers into a biased, secretive, and lawless forum, preventing either a court or an arbitrator from ordering a lawbreaker to repay all of its victims,” she said in a news release.

A subcommittee chairman of the House Financial Services Committee sent a letter to the CFPB saying the panel is investigating the examination and possible regulation of pre-dispute arbitration agreements in contracts for consumer financial products and services. The letter, dated April 20 from Rep. Sean Duffy (R-Wis.), asked the bureau to detail by May 4 all communications relating to pre-dispute arbitration agreements between the CFPB and certain interest groups — the American Association for Justice, National Consumer Law Center, National Association of Consumer Advocates, Alliance for Justice and Public Justice.

The committee said that, as of late afternoon May 4, it hadn’t heard back on its request.

To contact the reporter on this story: Jeff Bater in Washington

To contact the editor responsible for this story: Seth Stern