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Consumer Financial Protection Bureau’s Far-Reaching Proposed Rule Would Free Consumers From Class Action Bans In Mandatory Arbitration Clauses

Posted  July 15, 2016

By James J. Kovacs

Consumer lawsuits got a big boost on May 3, 2016, when the Consumer Financial Protection Bureau (“CFPB”) published its long-awaited proposed rule to prohibit class action bans in mandatory arbitration clauses.

Mandatory pre-dispute arbitration clauses require plaintiffs to seek remedial relief before an arbitrator instead of a state or federal court. If adopted, the CFPB’s proposed rule would effectively eliminate the use of pre-dispute arbitration agreements to block class-action lawsuits, affecting a large number of entities that offer financial services to consumers.

Arbitration agreements have long been favored in the United States. Notably, in 2011, the Supreme Court held that federal arbitration law preempts any state law attempting to prohibit class-action waivers in arbitration agreements.

However, in passing the Dodd-Frank Act, Congress authorized  the CFPB to conduct analysis and “prohibit, or impose conditions and limitations” on arbitration agreements between consumers and financial services providers.  In March 2015, the CFPB finished its analysis and released its Arbitration Study – a study designed to review mandatory pre-dispute arbitration clauses in contracts for credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile-wireless services. The study determined that the six consumer-finance markets contained a significant number of mandatory pre-dispute arbitration clauses impacting “tens of millions of consumers.”

Moreover, the CFPB study determined that arbitration clauses are being “used to block class actions in court.” In particular, data showed that credit-card issuers with arbitration clauses invoked the clauses to block class-action lawsuits 65 percent of the time.  The study also touted the benefits of class-action litigation compared to arbitration, noting that 32 million consumers were eligible for relief through class-action litigation with an average payout of $220 million from class-action settlements each year.  In contrast, of the 1,060 arbitration cases filed with the American Arbitration Association between 2010 and 2011, consumers obtained relief and debt forbearance in fewer than 100 cases with a combined worth of less than $400,000.

In response to the CFPB study, a number of entities and business advocates, including the U.S. Chamber of Commerce, have argued that the study is deeply flawed and ignores the benefits of arbitration, exaggerates the benefits of class-action litigation, and fails to account for reduced transaction costs associated with a corporation’s reliance on arbitration agreements.

The CFPB’s proposed rule responds directly to the study’s findings. The proposed rule seeks to impose two limitations on pre-dispute arbitration agreements: (1) a prohibition barring certain providers from using pre-dispute arbitration agreements that block consumer class actions, which would also require arbitration agreements to expressly reflect that limitation; and (2) a requirement that providers that use pre-dispute arbitration agreements must give the CFPB records reflecting arbitral proceedings.  Relying on the study’s analysis, the proposed rule states that arbitration is an “insufficient means of enforcing consumer financial laws and contracts,” and that class actions, “when not blocked by arbitration agreements, provide a valuable complement to public enforcement and a means of providing substantial relief to consumers.”  The CFPB states that the two provisions of the proposed rule are “in the public interest,” and will protect consumers, while also being “consistent with the study conducted” as required by Congress.

As currently drafted, the proposed rule would eliminate the pre-dispute arbitration agreements blocking consumer class actions in the “core consumer financial markets of lending money, storing money, and moving or exchanging money.” Providers impacted by the proposed rule include those in the areas of (1) consumer credit, (2) automobile leases, (3) debt management and debt settlement, (4) consumer reports, (5) deposit accounts, electronic-funds-transfer accounts, or money-transfer services, (6) payment-processing services, check cashing, check collections or check-guaranty services, and (7) debt collection.  The CFPB estimates that in total the rule will affect 53,000 providers throughout the United States.

In response to the proposed rule, critics argue that banning mandatory pre-dispute arbitration clauses is contrary to the public interest, leading to higher consumer costs and the loss of efficiencies of arbitration. The Republican-led House has also taken issue with the CFPB’s proposed rule, hosting a hearing and passing legislation attempting to constrain the CFPB monetarily from regulating pre-dispute arbitration agreements, and attempting to delay the date of the proposed rule until the CFPB meets specific reporting requirements.

The CFPB is accepting comments on its proposed rule until August 22, 2016, and is poised to implement the rule in mid-2017. It remains to be determined if mounting political pressure and disapproval from a variety of industry participants will derail the CFPB’s proposed rule.

However, if implemented, the rule would be a huge win for future plaintiffs. Class-action plaintiffs in consumer-finance markets would be able to sue any of the 53,000 providers in state or federal court without fear of defendants moving to compel arbitration.

Edited by Gary J. Malone

Tagged in: Antitrust Litigation,