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CFPB Considering Ban on Arbitration Clauses

October 7, 2015
5 min to read


WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) announced it is considering proposing rules that would ban arbitration clauses in consumer financial services contracts, less than five months after 50 members of Congress urged the bureau to eliminate such clauses.


Describing arbitration clauses as a “free pass” to block consumers from suing in groups to obtain relief, the CFPB said the proposals under consideration would give consumers “their day in court and deter companies from wrongdoings.”

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“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray in a statement. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”


In its press release announcing its intentions, the bureau cited results of a three-year studyit conducted on pre-dispute arbitration clauses. Released this past March, results showed, among other things, that more than 75% of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial services providers. The report also concluded that it is common for such clauses to be invoked to block class action lawsuits.


The study fueled more than 50 members of Congress, led by U.S. Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.), to issue a letter to the bureau this past May. It urged the regulator to eliminate arbitration clauses in consumer financial contracts.


“In total, the study conducted by the CFPB at Congress’ request roundly confirms that individuals unknowingly sign away their rights through forced arbitration agreements, which do not reduce consumer costs for financial service,” the letter read, in part. “Moreover, forced arbitration shields corporations from liability for abusive, anti-consumer practices, encouraging even more unscrupulous business conduct at the expense of individuals and law-abiding businesses.


“Based on this substantial bedrock of evidence, we urge the CFPB to move forward quickly to use its authority under the Dodd-Frank Act to issue strong rules to prohibit the use of forced arbitration clauses in financial contracts and give consumers a meaningful choice after disputes arise.”

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But not everyone took the study’s findings at face value. In April, Tom Hudson, F&I and Showroom’s legal columnist and Hudson Cook LLP partner, criticized the CFPB’s report for its “gaping holes” — such as failing to address the growing consumer-friendliness of arbitration clauses.


“In fact, it isn’t unusual to see clauses that provide for the payment by the creditor of some or all the costs of arbitration,” Hudson wrote. “Creditors also frequently call attention to the presence of an arbitration agreement by using large type, separately boxing the clause or having it separately signed or initiated. The study offers no insight on whether these best practices might change any of its conclusions.


“There is much to dislike about the CFPB’s work on arbitration,” Hudson added. “You’d think arbitration must have some things to recommend it, since Congress passed the Federal Arbitration Act and nearly all states have enacted laws permitting arbitration. But the bureau seems determined not to see any good in the process.”


The American Financial Services Association also took issue with the bureau’s study and proposals, saying in a statement issued to F&I and Showroom that the bureau has not provided any meaningful link beween arbitration and class action lawsuits. It also noted that academic studies have shown that arbitration cases actually produce more in the way of settlements than class action lawsuits.


“As the CFPB study indirectly points out, class action attorneys are the real winners, raking in excess of $424 million in fees awarded in settlements during the period studied,” the statement read. “The bureau that is entrusted to protect consumers is again making it policy to deprive them of that very protection. In essence, the rules that the bureau is proposing would deprive consumers of a low-cost, lawyer-free dispute resolution system and replace it with an expensive, lengthy, and complex judicial process.”

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Included in the bureau’s announcement was an outline of the proposals under consideration. They will be reviewed by a panel of “small industry stakeholders” as the bureau’s first step in its potential rulemaking process. The proposals include a complete elimination of arbitration clauses that block class action lawsuits. The ban would apply to credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.


Creditors would also have to say explicitly that arbitration clauses found in their agreements do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court. The bureau also wants to require companies that choose to use arbitration clauses for individual disputes to submit to the CFPB the arbitration claims filed and awards issued.


“This will allow the bureau to monitor consumer finance arbitrations to ensure that the process is fair for consumers,” read the CFPB’s press release, which noted that the bureau will seek input from the public, consumer groups, industry and other stakeholders before continuing with its rulemaking process. “The bureau is also considering publishing the claims and awards on its website so the public can monitor them.”

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