Politics & MoneyMortgage

CFPB sets its crosshairs on lending arbitration clauses

Too limiting for trial lawyers who want class action lawsuits

The Consumer Financial Protection Bureau is going after standard arbitration clauses, an avenue with a nine-decade pedigree designed to allow consumers and businesses a far less expensive option.

Arbitration clauses generally require that if there's a dispute, parties must first try to resolve the issue through an arbitration process before going the formal route of a lawsuit. Some require arbitration in lieu of lawsuits.

The problem, the CFPB claims, is they limit the ability of trial lawyers to bring class action lawsuits.

Cordray spoke on this issue at a “field hearing” in Denver on Wednesday. The CFPB typically uses field hearings as the venue for announcing new developments, including taking the next steps towards issuing a proposed rule.

According to Ballard Spahr, the next step would be the convening of a small business review panel required by the Small Business Regulatory Enforcement Fairness Act and the Dodd-Frank Act to provide input on the proposal the CFPB is contemplating.

“Companies use this clause, in particular, to block class action lawsuits,” Cordray said Wednesday in a speech in Denver.  “They thus provide themselves with a free pass from being held accountable by their customers.  That free pass is secured by making sure their customers cannot group together to seek relief for wrongdoing.”

Cordray argues that because many violations of consumer financial law involve relatively small amounts of money for the individual victim, class action lawsuits requiring trial lawyers are the only effective way consumers can get accommodation.

Arbitration clauses are standard and have been for decades in most financial contracts, including agreements for credit cards and checking accounts as well as mortgage lending. 

The Truth in Lending Act already bans mandatory arbitration provisions in certain mortgage loans. The CFPB proposed rule could expand that. 

Cordray says that the CFPB will launch a rulemaking process designed to prohibit contracts that require arbitration as an alternative to costly class action lawsuits.

“This would apply generally to the consumer financial products and services that the bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well,” he said.

“One approach we might have taken would be a complete ban on all pre-dispute arbitration agreements for consumer financial products and services.  Our proposal would not do that,” he said. “ 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.” 

“This means we are not proposing at this time to limit the use of arbitration clauses as they apply to individual cases,” Cordray said.

Richard Hunt, president and CEO of the Consumer Bankers Association, tells HousingWire Cordray’s proposal is counter to the CFPB’s own findings on the impact of arbitration clauses.

“Arbitration has provided consumers the benefits of quick and easy access to an affordable dispute resolution option for nearly 90 years,” Hunts said. “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,” he said.

Meanwhile, the progressive group Americans for Financial Reform praised the CFPB’s move.

“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,” the group said in a release.

U.S. Rep. Randy Neugebauer, R-Texas, said this would not help consumers.

“Today’s proposed regulatory outline from the CFPB would essentially ban arbitration under the guise of consumer protection. Unfortunately, the Bureau disingenuously ignores arbitration’s pro-consumer features, which were highlighted in its own study. This latest effort will create more jobs and opportunity for trial lawyers instead of helping hardworking Americans on Main Street," he said.

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