The CFPB Moves Toward Effective Ban of Arbitration Clauses in Consumer Financial Services Contracts
In an outline of proposals it is considering incorporating into regulation, on October 7, 2015 the CFPB announced that it plans to essentially eliminate the use of binding arbitration clauses in a wide array of financial services consumer contracts. These clauses obligate consumers to pursue disputes through arbitration rather than by filing lawsuits or class actions in court. The CFPB's ban on arbitration clauses would apply to contracts for credit cards, checking and savings accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.
Financial service providers, like many other businesses, view arbitration as more efficient and less costly for all parties than litigation, and the U.S. Supreme Court has affirmed the "overarching principle," embedded in the Federal Arbitration Act, "that arbitration is a matter of contract law," which parties to a contract may freely choose to use for dispute resolution. (American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013).) The CFPB asserts, however, that class action lawsuits allow consumers with disputes involving smaller dollar amounts to pool costs and retain affordable common legal counsel, and that consumers are unaware they are foregoing their ability to pursue class actions when they sign contracts containing a mandatory arbitration clause. In support, the CFPB cites its March 2015 Study for the propositions that more than 75% of credit card customers surveyed did not know they were subject to an arbitration clause and more than 90% did not realize the clause restricted their ability to sue in court. In his prepared remarks, the CFPB Director Richard Cordray stated that contractual provisions requiring arbitration for dispute resolution amounted to asking consumers to "sign away their legal rights" and a "free pass [for companies] to sidestep the courts and avoid accountability for wrongdoing."
The proposal would allow arbitration clauses in narrow circumstances: for individual claims or where the contracts explicitly barred the use of arbitration unless and until class certification was denied by the court or the class claims were dismissed in court. Based on these limited exceptions, the CFPB says it is not prohibiting arbitration clauses altogether. The CFPB is also considering requiring businesses that use even such limited arbitration clauses to submit to the CFPB the arbitration claims that are filed and awards that are issued. The CFPB may publish these claims and awards on its website to enable public monitoring.
While the CFPB is making its outline of proposals public, it is seeking comment at this time only from small entity representatives (SERs) that have been selected to participate in a panel proceeding under the Small Business Regulatory Enforcement Fairness Act (SBREFA). That proceeding includes a closed meeting on October 28, 2015, written comments two weeks later, and a nonpublic panel report completed no later than December 27, 2015 by the CFPB, with the participation of the Small Business Administration's Office of Advocacy and the Office of Management and Budget's Office of Information and Regulatory Affairs. The purpose of a SBREFA proceeding is to examine the impact of the CFPB's proposals on small businesses, and consider ways to accomplish the CFPB's regulatory objectives that are less burdensome on small entities. The CFPB also is seeking comment from the SERs on a broader question: whether the proposals "are the most effective means of furthering consumer and public interests in light of the Study and other evidence regarding use of arbitration agreements in connection with contracts for consumer financial products and services." At a later point in the rulemaking process, once the CFPB has proposed a rule, all interested parties will have the opportunity to comment on the public record.
SBREFA panel proceedings are an extra step in the regulatory process, required of only the CFPB and two other federal agencies. The process is designed to offer extra protection by forcing these agencies to consider adverse impacts on small businesses at an early stage in the rulemaking and assess ways to ameliorate that burden. Because this input comes before a rule is actually proposed and because the CFPB is required to take into account the comments submitted by the SERs, the SBREFA process can be very effective in raising issues with a proposed course of regulatory action.
For more information on the SBREFA process and the CFPB's rulemaking efforts on arbitration and other matters, contact a member of Clark Hill's Consumer Financial Services Regulatory & Compliance Group, which provides strategic legal counsel to clients in all areas of consumer finance. Our group can help navigate this rapidly evolving regulatory environment. Our team of lawyers and government and regulatory advisers has extensive experience in – and an in-depth understanding of – the laws and regulations governing consumer financial products and services. We can assist in developing and implementing compliance programs, as well as defending consumer litigation, development of regulation, and regulatory enforcement actions.
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