By Jeff Bater
Oct. 7 — Banks and other firms would be barred from including arbitration clauses used to block class action lawsuits in agreements governing products ranging from credit cards to payday and private student loans, under proposals the Consumer Financial Protection Bureau announced Oct. 7.
The CFPB announcement comes seven months after the agency issued a study that found arbitration clauses in agreements with the financial services industry are little understood by consumers and can restrict their ability to seek redress through class action settlements when disputes emerge.
“Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing,” CFPB Director Richard Cordray said in a statement. “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.”
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 proposal immediately encountered stiff resistance from House Republicans and the banking industry who say arbitration has significant benefits over litigation in general and class action litigation in particular and have called for further research on the issue.
Rep. Jeb Hensarling (R-Texas), the chairman of the House Financial Services Committee, said in a statement that the CFPB “should change its name to the ‘Trial Lawyers’ Employment Protection Bureau.'”
“This new policy helps just one constituency–and apparently the one that matters most to Democrats–trial lawyers,” Hensarling said. “Forcing consumers to hire expensive lawyers and go to trial rather than use a low-cost dispute resolution system harms the very low and middle income consumers the CFPB should be helping.”
House Republicans have already signaled plans to use the appropriations process to thwart a mandatory arbitration rulemaking. In June, the House Appropriations Committee adopted an amendment to the fiscal 2016 financial services appropriations bill seeking to halt the rulemaking process and requiring additional research.
The CFPB stopped short of formally proposing a rule, instead saying it is taking “the first step in the process of a potential rulemaking on this issue” and preparing to convene a small business review panel to gather industry feedback.
Cordray said the proposal under consideration does not ban arbitration entirely. “Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court,” he said in prepared remarks for a Denver field hearing. “This means we are not proposing at this time to limit the use of arbitration clauses as they apply to individual cases.”
At the Denver hearing, Alan Kaplinsky, a partner at Ballard Spahr, called the bureau's approach “a de facto ban.”
“If this proposal becomes a final regulation, most companies will simply abandon arbitration altogether,” he said. “That's because the cost-benefit analysis of using arbitration will shift dramatically. While companies' dispute- resolution costs will soar, consumers will be the ultimate losers here. They will no longer have available to them arbitration, which has been proven by the CFPB's own data in its own arbitration study to be faster, cheaper and a more effective form than courts for resolving disputes.”
The CFPB proposal would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. The CFPB said that would apply to most consumer financial products and services that the CFPB oversees, including 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.
Consumers shouldn't be asked to “sign away their legal rights” when they open a bank account or apply for a credit card, Cordray said in a statement. The agency said that previous CFPB survey results reported that only around 2 percent of consumers surveyed would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute.
The proposals under consideration would also require that companies that choose to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and awards issued, which would allow for better monitoring and transparency, the agency said.
Cordray had signaled CFPB planned action on arbitration clauses at a Senate Banking Committee hearing in July where he said the bureau would convene a small business review panel as a first step.
Nessa Feddis, the American Bankers Association's senior vice president and deputy chief counsel for consumer protection and payments, said consumers will get less and pay more if the proposals are adopted.
“The CFPB's own study found that members of class action suits don't fare well compared to consumers using arbitration,” she said in an emailed statement. “According to the Bureau, members of class action suits received an average of $32.35 while those who went to arbitration received an average of $5,389. The proposal will serve only to promote less consumer-friendly class action suits while greatly reducing the availability of efficient, fair and less costly arbitration.”
Sen. Sherrod Brown (D-Ohio), the top Democrat on the Senate Banking Committee, praised the CFPB announcement. “The CFPB's decision to address the unjust and harmful practice of forced arbitration is an important step toward leveling the playing field for consumers,” said Brown, the ranking member of the Banking Committee. “I will keep urging the CFPB to take the strongest action possible to restore consumers’ right to hold corporations accountable.”
— Tripp Baltz in Denver contributed to this story.
To contact the reporter on this story: Jeff Bater in Washington at email@example.com
To contact the editor responsible for this story: Seth Stern at firstname.lastname@example.org
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