CFPB Bans Mandatory Arbitration in Financial Services Contracts

Yesterday the Consumer Financial Protection Bureau (CFPB) announced “a new rule to ban companies from using mandatory arbitration clauses to deny groups of people their day in court.”  A copy of the Press Release announcing the rule can be found here.

In the announcement, CFPB Director Richard Cordray commented: “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. 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." 

Per the Press Release: 

The Dodd-Frank Wall Street Reform and Consumer Protection Act required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. Congress also authorized the Bureau to issue regulations that are in the public interest, that are for the protection of consumers, and which are 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. 

Hundreds of millions of contracts for consumer financial products and services have included mandatory arbitration clauses. These 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. With group lawsuits, a few consumers can pursue relief on behalf of everyone who has been harmed by a company’s practices. 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.  

These clauses are not only common and unknown; they are also bad for consumers. By blocking group lawsuits, companies are able to: 

• Deny consumers their day in court: The study showed that few consumers ever bring – or consider bringing – individual actions against their financial service providers either in court or in arbitration. 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. As a result, the real effect of mandatory arbitration clauses is to insulate companies from most legal proceedings altogether. 
• Avoid paying out big refunds: Individual actions get less overall relief for consumers than group lawsuits because companies do not have to provide relief to everyone harmed. According to the study, group lawsuits succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year. The study showed that over 34 million consumers received payments, and that $1 billion was paid out to harmed consumers over the five-year period studied. Conversely, in the roughly one thousand cases in the two years that were studied, arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.
• Continue harmful practices: Individual actions might recoup previous individual losses, but they do nothing to stop the harm from happening again or to others. Resolving group lawsuits often requires companies to not only pay everyone back, but also change their conduct moving forward. This saves countless consumers the pain and expense of experiencing the same harm. The Bureau’s study found that in 53 group settlements covering over 106 million consumers, companies agreed to change their business practices or implement new compliance programs. Without group lawsuits, private citizens have almost no way, on their own, to stop companies from pursuing profitable practices that may violate the law. 

The CFPB had announced the proposed rule in May of 2016.  Public comment occurred thereafter. An initial review of the rule doesn’t show any substantive changes from the original proposal.

A copy of the rule can be found here. The effective date is 60 days following publication in the Federal Register and applies to contracts entered into more than 180 days after that. 

This morning, the CFPB released resources to assist in compliance with the rule. You can access their new implementation web page here.

insideARM Perspective

This rule will be cheered by class action lawyers everywhere. But, financial institutions and other entities that may ultimately be covered by this rule may not be very happy with this development. Still, the announcement is hardly a surprise.  On March 10, 2015 insideARM wrote about the CFPB study finding that mandatory arbitration agreements limit relief for consumers.

For an interesting alternate view of arbitration provisions insideARM suggests this November 2, 2015 article on the U.S. Chamber of Commerce Institute for Legal Reform web site.

There is already speculation about how the Trump administration and Congress will react to this announcement.  It will be interesting to see how and when the administration and Congress may respond.