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CFPB unleashes new arbitration rule

Joe Mont | July 11, 2017

One of the most controversial rules ever proposed by the Consumer Financial Protection Bureau—banning companies from using mandatory arbitration clauses—is now final.

Many consumer financial products like credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from filing class action lawsuits and require the use of arbitration.

"Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong," CFPB Director Richard Cordray said in a statement. "These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."

Mandatory arbitration clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for individual cases brought in small claims court. While these clauses can block any lawsuit, companies almost exclusively use them to block group lawsuits, which are also known as “class action” lawsuits, a CFPB statement explains.

“With group lawsuits, a few consumers can pursue relief on behalf of everyone who has been harmed by a company’s practices,” the Bureau’s statement added. “Almost all mandatory arbitration clauses force each harmed consumer to pursue individual claims against the company, no matter how many consumers are injured by the same conduct. However, consumers almost never spend the time or money to pursue formal claims when the amounts at stake are small.”

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

Congress also authorized the Bureau to issue regulations based on findings that are consistent with the Bureau’s study of arbitration. Released in March 2015, the study showed that credit card issuers representing more than half of all credit card debt and banks representing 44 percent of insured deposits used mandatory arbitration clauses. Yet three out of four consumers the Bureau surveyed did not know whether their credit card agreement had an arbitration clause.

Only about 2 percent of consumers with credit cards surveyed said they would consult an attorney or consider formal legal action to resolve a small-dollar dispute.

The CFPB’s rule restores consumers’ right to file or join group lawsuits. Companies can still include arbitration clauses in their contracts, but may not use arbitration clauses to stop consumers from being part of a group action. The rule includes specific language that companies will need to use if they include an arbitration clause in a new contract.

The rule also makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.

The Bureau will collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards.

“Gathering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair,” a Bureau statement says. “The materials must be submitted with appropriate redactions of personal information.” The Bureau intends to publish these redacted materials on its website beginning in July 2019.

The new CFPB rule applies to the major markets for consumer financial products and services overseen by the Bureau, including those that lend money, store money, and move or exchange money. Congress already prohibits arbitration agreements in the largest market that the Bureau oversees—the residential mortgage market.

In the Military Lending Act, Congress also has prohibited such agreements in many forms of credit extended to servicemembers and their families.

The rule’s exemptions include employers when offering consumer financial products or services for employees as an employee benefit; entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, which have their own arbitration rules; broker dealers and investment advisers overseen by state regulators; and state and tribal governments that have sovereign immunity from private lawsuits.

The new rule’s effective date is 60 days following publication in the Federal Register and applies to contracts entered into more than 180 days after that.