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From Banking and Finance Law Daily, August 15, 2016

State AGs support CFPB arbitration proposal, urge total ban

By Charles A. Menke, J.D.

A group of 18 state attorneys general have sent a letter to the Consumer Financial Protection Bureau supporting the bureau’s proposed rule restricting the inclusion of predispute arbitration clauses in consumer financial products and services contracts. In the multistate letter, which was spearheaded by Massachusetts Attorney General Maura Healy, the attorneys general expressed their support for prohibiting the application of predispute arbitration agreements to bar class action litigation in court, as well as requiring covered entities to submit to the bureau initial arbitration claim filings and awards. The letter was co-sponsored by New York Attorney General Eric Schneiderman, California Attorney General Kamala Harris, and Washington D.C. Attorney General Karl Racine, and joined in by the following 14 states: Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Mississippi, New Hampshire, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington.

Bureau proposal. The bureau issued a proposed rule in May 2016 that would prohibit the inclusion of mandatary arbitration clauses in new contracts that prevent class action lawsuits. The proposal, however, allows companies to include arbitration clauses in their contracts, if the clauses explicitly state that consumers are not prevented from being part of a class action in court, using specific language provided by the bureau (see Banking and Finance Law DailyMay 5, 2016).

Total ban urged. In their letter, the attorneys general stated that the bureau’s proposal “provide[s] a substantial benefit to consumers by restoring their fundamental right to join together to be heard in court when common disputes arise in the commercial marketplace.” Nevertheless, they contend that consumers would be best served by a total ban on mandatory, predispute arbitration clauses in consumer financial contracts, and urged the bureau to consider adopting final regulations to that effect.

Class action benefits. According to the attorneys general, mandatory predispute arbitration clauses allow serious violations of law to go “undetected, undeterred, and unremedied.” On the other hand, the letter pointed out that class action lawsuits: (i) provide monetary relief to consumers; (ii) act as a deterrent to both the specific defendant and the industry as a whole; and (iii) lead to the reform of unlawful, unfair, or deceptive business practices. In addition, “successful class actions have led to important legislative reforms,” the letter said.

Transparency. With respect to the proposed requirement that covered entities submit claim filings and written awards in arbitration proceedings to the bureau, the attorneys general encouraged the bureau to publish the information on its website. They further suggested that the bureau enact and enforce timing obligations for the reporting of the information, and implement penalties against those entities that fail to comply.

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