CFPB Proposes Limits to Mandatory Arbitration Clauses

How will the new arbitration rule affect lenders and other financial firms?

The Consumer Financial Protection Bureau (CFPB) intends to limit mandatory arbitration clauses that banks and financial firms have long relied on to prevent class action lawsuits. This move comes after the CFPB conducted a study that was authorized by the Dodd-Frank law. The proposed rule applies to a variety of consumer financial products and services such as lending, storing and exchanging money.

While arbitration clauses will no longer encompass class actions, the new rule will keep mandatory arbitration in place for individual consumer actions. It remains to be seen whether this is the first step in completely eliminating arbitration clauses, however. CFPB Director Cordray painted these agreements as “gotcha contracts” that force certain groups of consumers to forfeit their legal rights.

The new rule will require firms that include arbitration clauses in their client agreements to revise these provisions by explicitly stating that arbitration cannot be used to prevent consumers from being part of a class action. One the final rule is issued, after the comment period closes in August, the CFPB intends to provide specific language that these firms must use. In addition, the consumer watchdog intends to monitor arbitration proceedings and will require firms to submit any materials used in an arbitrated case.

Industry groups are obviously opposed to the CFPB’s proposed rule because they contend removing class actions from arbitration will lead to a surge of lawsuits that will only benefit trial attorneys. They also contend that consumers will not be helped by the new rule in light of an earlier study by the CFPB that revealed that groups of consumers fair better in arbitration proceedings than those who join a class action.

Others argue that the proposed rule is designed to protect low income families and students who are typically more vulnerable to being pushed into loans and other consumer finance products with higher interest rates. These individuals also have no choice but to accept mandatory arbitration and in so doing surrender their basic legal rights.

The rule will become effective 210 days from the date when a final rule is announced which gives banks and other financial firms time to plan ahead for the compliance costs associated with revising their client agreements and the administrative costs they will incur for providing arbitration material to the CFPB. If you have questions about the new arbitration rule, you should engage the services of an experienced regulatory/compliance attorney.