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From Banking and Finance Law Daily, October 7, 2015

CFPB to ban ‘free pass’ no-class action clauses?

By Lisa M. Goolik, J.D.

Taking another step closer to regulating mandatory pre-dispute arbitration clauses, the Consumer Financial Protection Bureau has released an outline of the proposals under consideration. While the bureau’s proposals would not ban arbitration clauses in their entirety, the proposals would ban arbitration clauses that block class action lawsuits in consumer contracts. The proposed ban would apply to most consumer financial products, 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.

At an Arbitration Field Hearing in Denver, CFPB Director Richard Cordray remarked, “Companies use this clause, in particular, to block class action lawsuits. They thus provide themselves with a free pass from being held accountable by their customers. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

Arbitration study. In March, the bureau released the results of its arbitration study, in which it concluded that arbitration clauses restrict consumers’ relief for disputes with financial service providers by limiting class actions. The bureau found that very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements (see Banking and Finance Law Daily, March 10, 2015).

In his remarks, Cordray noted that violations of consumer protection laws may result in relatively little harm per individual victim, and as a result, class actions “often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers.”

As further highlighted in the bureau’s blog, class action lawsuits allow consumers to “band together” to seek relief for harms that are too small to be practical to sue over as an individual. According to the CFPB’s study, from 2008 to 2012, approximately 6.8 million consumers received $220 million in payments from class action settlements per year.

However, the bureau’s study also found that most arbitration agreements can be used to move class lawsuits from court to arbitration, where class proceedings are typically prohibited under the arbitration agreement. Companies often successfully use arbitration agreements in consumer financial class litigation cases filed in court to block access to any form of class proceeding for those claims.

Proposed rulemaking. To address these concerns, the bureau is considering a proposed rulemaking that would require any arbitration agreement included in a contract for a consumer financial product or service offered by a covered entity to expressly provide that the arbitration agreement is inapplicable to class action cases unless and until class certification is denied or the class claims are dismissed. The requirement would apply to arbitration agreements entered into at least 180 days from the effective date of any regulation.

The bureau is also proposing to require covered entities that use arbitration agreements to submit initial claim filings and written awards in consumer finance arbitration proceedings to the bureau. The bureau is also considering whether to publish the claims or awards to its website, making them available to the public. This would permit the bureau (and the public, if the bureau chose to publish them) to monitor arbitrations and identify arbitration trends and potentially problematic business practices that harm consumers. The bureau also believes that publication would provide transparency to the arbitration process.

Covered companies. According to the bureau, the proposed ban would apply to companies that provide financial products or services for consumer purposes, as defined in the Dodd-Frank Act. The bureau provided an extensive list of companies which may be affected, including, but not limited to: depository institutions, credit unions, credit card issuers, certain auto and auto title lenders, payday lenders, private student lenders, loan originators that are not creditors, remittance transfer providers, currency exchanges, issuers of general-purpose reloadable prepaid cards, virtual currency providers, credit repair organizations, debt settlement firms, providers of credit monitoring services, and debt buyers. The bureau is also considering whether to cover additional consumer financial products and services, such as payment processing.

The bureau is considering excluding from its proposed regulation products or services that are in any of the following categories:

  1. already subject to arbitration rules issued by the Securities and Exchange Commission or the Commodity Futures Trading Commission;
  2. provided by persons when not regularly engaged in business activity, such as an individual who may loan money to a friend;
  3. provided by the federal government;
  4. provided by state, local, and tribal governments and government entities to persons in their jurisdiction, or to persons outside their jurisdiction if it is not credit subject to the Truth in Lending Act or Regulation Z; and
  5. credit a business extends for the consumer’s purchase of its own nonfinancial goods or services when covered by Section 1027(a)(2)(B)(ii) of the Dodd-Frank Act.

Alternatives considered. The bureau considered prohibiting arbitration agreements entirely, which would ban arbitration of individual claims, or to require certain safeguards to ensure fairness. The bureau rejected those alternatives because the evidence to date “is inconclusive due in part to the low number of claims resolved in arbitration.”

The bureau also rejected consideration of an alternative that would allow companies to require class arbitration for consumer finance claims because the bureau “was not confident that class arbitration is a reliable setting for aggregated resolution of consumer finance claims.”

Benefits of the proposals. In its release, the bureau cited multiple benefits, including “a day in court” for consumers, a deterrent effect, and increased transparency. The bureau believes the proposals under consideration would provide consumers with the opportunities to obtain relief they otherwise might not get. For that same reason, the proposals may “incentivize companies to comply with the law to avoid lawsuits,” said the bureau. The proposals under consideration would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit the claims filed and awards issued in arbitration to the CFPB.

Small Business Review Panel. The bureau released the proposal in advance of convening a Small Business Review Panel to gather feedback from small industry stakeholders. The public will be invited to submit written comments when any proposed regulations are issued.

RegulatoryActivity: CFPB ConsumerCredit CreditDebitGiftCards DoddFrankAct

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