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CFPB / RegulatoryMortgage

CFPB’s rule to limit arbitration opens door to class action against banks

But industry questions consumer benefit

The Consumer Financial Protection Bureau is seeking comment on a new proposed regulation that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court, putting into motion discussions that started toward the end of last year. 

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, and the arbitrator is hired by the banks. 

The CFPB argues that these clauses that are used in financial products like credit cards and bank accounts generally prevent consumers from joining together to sue their bank or financial company for wrongdoing. 

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” said CFPB Director Richard Cordray. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

If the proposal goes through, the bureau said it would open up the legal system to consumers so they could file a class action or join a class action when someone else files it.

Companies would still be able to include arbitration clauses in their contracts, but for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court, the bureau said.  

Sen. Sherrod Brown, D-OH, ranking member of the U.S. Senate Committee on Banking, applauded the CFPB’s proposed rule. “Ohio consumers deserve the right to have their day in court when they’ve been wronged, but many don’t realize they’ve surrendered that right through forced arbitration,” said Brown.

Sen. Robert Menendez, D-N.J, a senior member of the Senate Banking Committee, echoed similar praise and said, “This is very good news for consumers – because no one should be unwittingly be denied their right to seek redress against a financial institution because of a mandatory arbitration clause buried in the fine print of a contract.”

Meanwhile, National Association of Federal Credit Unions Director of Regulatory Affairs Alexander Monterrubio said, “NAFCU and our members believe that consumers should have access to fair and efficient methods of dispute resolution. To that end, we urge the bureau to avoid promulgating any rule that unreasonably limits the availability of arbitration or creates burdensome reporting requirements that negatively affect credit unions.”

“NAFCU is especially concerned with the CFPB’s plan to publish the arbitration data it collects as such actions would present system-wide reputational risk, meddle in the arbitration process, and create significant privacy issues,” continued Monterrubio.

When talk first started surrounding arbitration clauses, it received mixed opinions. (Read the comments in this article)

One study from the Mercatus Center at George Mason University, conducted by law professors Jason Johnston and Todd Zywicki, provides an overview and critique of the CFPB’s own report that they say shows such regulation would be counter-productive.

“The CFPB’s findings show that arbitration is relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products, and that regulatory efforts to limit the use of arbitration will likely leave consumers worse off,” they conclude. “Moreover, owing to flaws in the report’s design and a lack of information, the report should not be used as the basis for any legislative or regulatory proposal to limit the use of consumer arbitration.”

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