The Consumer Financial Protection Bureau (CFPB) says it is considering proposing new rules that would ban consumer financial companies from using ‘free pass’ arbitration clauses to block consumers from suing in groups to obtain relief.
Most arbitration clauses deny consumers the right to participate in group lawsuits against companies. According to the CFPB's release, this free pass enables companies to sidestep the legal system, avoid big refunds, and pursue profitable practices that may violate the law and harm innumerable consumers. These proposals would give consumers their day in court and deter companies from further wrongdoing.
Many contracts for consumer financial products and services include arbitration clauses, which usually state that either the company or consumer can require disputes about that product to be resolved by privately appointed individuals (arbitrators), rather than through the court system. This clause allows either side to prevent lawsuits from proceeding in court and also typically bars consumers from bringing group claims through the arbitration process. Consequently, no matter how many consumers are injured by the same conduct, consumers must resolve their claims individually against the company.
The CFPB released a study in March that looked at the use of arbitration clauses in consumer financial markets. The study showed that arbitration clauses restrict consumers' relief for disputes with financial service providers by allowing companies to block group lawsuits.
The study also found that very few consumers individually seek relief through arbitration or the federal courts, yet millions of consumers are eligible for relief each year through group settlements. According to the study, more than 75% of consumers surveyed in the credit card market did not know whether they were subject to an arbitration clause. Fewer than 7% of those consumers covered by arbitration clauses realized that the clauses restricted their ability to sue in court.
The CFPB has now published an outline of the proposals in preparation for convening a Small Business Review Panel to gather feedback from small industry stakeholders.
As stated, the proposals would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts – and this would apply to most consumer financial products and services 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.
The CFPB notes that the proposals would not ban arbitration clauses in their entirety. However, the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until the court denies the class certification or the class claims are dismissed in court.
The proposals would also require companies choosing to use arbitration clauses for individual disputes to submit the claims filed and awards issued to the CFPB, so the bureau can monitor consumer finance arbitrations. The bureau is also considering publishing the claims and awards on its website so the public can monitor them.
Per the CFPB's release, the proposals would get consumers their day in court, incentivize companies to comply with the law to avoid lawsuits, and increase transparency of the arbitration process.
Richard Hunt, president and CEO of the Consumer Bankers Association, says the group is ‘disappointed’ in the CFPB's move, according to a press release.
‘Arbitration has provided consumers the benefits of quick and easy access to an affordable dispute resolution option for nearly 90 years. As a last resort, if legal recourse is necessary, arbitration has proven to be the best path forward because it is mutually beneficial to all parties: consumers and lenders.
‘We are disappointed the bureau, despite numerous studies and the CFPB's own report, is choosing to side with trial attorneys over the interests of consumers. Given today's announcement is not final, we hope the CFPB will reconsider its decision,’ Hunt says.
On the other hand, nonpartisan and nonprofit coalition Americans for Financial Reform commended the proposal.
‘The Consumer Financial Protection Bureau has taken a big first step toward addressing a huge problem: the ability of banks and financial companies to get away with systematic wrongdoing by telling consumers they can't join forces over a common grievance,’ says the group's recent release.
The public is invited to submit written comments once the bureau issues the proposed regulations.