CFPB Plans May 5 Hearing on Arbitration; Expected to Propose Rule

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By Jeff Bater

April 21 — A long-awaited proposal on the use of arbitration agreements in certain consumer financial services contracts is likely to be released by the Consumer Financial Protection Bureau (CFPB) on May 5 when it holds a field hearing, agency watchers said.

The CFPB announced last October it is considering rules that would ban banks and other financial companies from using “free pass” arbitration clauses to block consumers from suing in groups to obtain relief . The hearing in Albuquerque, N.M., will feature remarks from agency Director Richard Cordray and testimony from consumer groups, industry representatives and members of the public, according to a CFPB notice.

“Because the Bureau usually combines field hearings with announcements of related developments, it is likely to announce its proposed arbitration rules that day,” Jeff Sovern, a professor at St. John's University School of Law, wrote in the Consumer Law & Policy Blog sponsored by the Public Citizen litigation group.

Restricting Class Actions Waivers

Joe Olson, a partner with Michael Best & Friedrich LLP in Milwaukee, told Bloomberg BNA in an e-mail he anticipates the CFPB will release a proposed rule limiting or prohibiting class-action waivers in arbitration clauses. He said the CFPB has a history of using field hearings as a vehicle for announcing new developments.

“If they release a proposed rule, I suspect it will be in what the CFPB believes is final or near final form,” Olson said. “That would mean a final rule would most likely become effective sometime after the summer of 2017.”

At issue are clauses in contracts for financial products and services that require consumers to submit any future disputes to an arbitrator, rather than to a court. The CFPB has indicated that its proposal to limit or ban mandatory arbitration would cover a wide range of products, including credit cards, checking accounts, student loans and payday loans.

A CFPB spokesman declined to comment April 21 on whether a proposed rule will be released at the upcoming field hearing.

Abandoning Arbitration?

The agency issued a study in March 2015 that found arbitration clauses in agreements with the financial service industry are little understood by consumers and can restrict their redress if disputes emerge . In October, the bureau published an outline of the proposals under consideration. “The proposals being considered would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts,” the CFPB said.

The outline was a step in the long rulemaking process that included convening a review panel to gather feedback from industry. At the time, the CFPB held a field hearing in Denver, where Alan Kaplinsky, a partner at Ballard Spahr, gave testimony and called the agency's approach “a de facto ban” that could lead to most companies simply abandoning arbitration altogether .

In a conversation with Bloomberg BNA later in the year, Kaplinsky said the CFPB seemed to be “hellbent on issuing a regulation banning class-action waivers .”

Kaplinsky said in a Ballard Spahr blog post April 21 that he expects that the CFPB hearing will coincide with the release of a proposed rule. If the CFPB proposes a rule May 5, it is likely a final regulation would not take effect before summer 2017, Kaplinsky said.

“In the meantime, companies who do not presently use arbitration agreements in their financial services contracts should strongly consider adding them, since agreements entered into before a rule becomes effective are grandfathered under existing law which is favorable to class action waivers,” he wrote.

— With assistance from Chris Bruce.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Mike Ferullo at mferullo@bna.com

For More Information

The CFPB blog post on the hearing is available at http://src.bna.com/ejv.