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CFPB Floats Rule to Ban Use of Arb Clauses to Block Class-Action Suits

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The Consumer Financial Protection Bureau issued Thursday a proposed rule that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets.

The CFPB seeks comment on the proposal, which prohibits companies from putting mandatory arbitration clauses that prevent class-action lawsuits in new contracts.

“The proposal 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,” CFPB states.

Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, 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 measure would provide the specific language that companies must use.

A CFPB study released in March concluded that across substantially all consumer finance markets, pre-dispute forced arbitration clauses are extremely prevalent and detrimental to consumers’ ability to seek legal relief when they are wronged.

State securities regulators and consumer advocates applauded the study when it was released and praised the proposed rule released Thursday. GOP lawmakers, however, aired their concerns about CFPB’s plan.

In releasing the proposal, Richard Cordray, CFPB’s director, said that because “many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB is proposing to ban this “contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

In recent years, he said, “many contracts for consumer financial products and services – from bank accounts to credit cards – have included mandatory arbitration clauses. They affect hundreds of millions of consumer contracts.”

These clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for cases brought in small claims court. Where these clauses exist, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. As a result, no matter how many consumers are injured by the same conduct, consumers must resolve their claims individually against the company.

The proposal would also require companies with arbitration clauses to submit to the CFPB claims, awards and certain related materials that are filed in arbitration cases. This would allow the CFPB “to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers.” Rachel Weintraub, legislative director and general counsel at Consumer Federation of America, said that CFPB’s proposed rule “will restore an important tool to consumers who have been harmed and will also deter bad actors who know that if they mistreat consumers even in small ways, those consumers will be able join together and efficiently get the remedies they are entitled to.”

However, Randy Neugebauer, R-Texas, chairman of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, said after the rule was proposed that “in proposing to limit consumer access to arbitration as recourse after harm, the CFPB has ignored its own study and the overwhelming data demonstrating greater consumer benefit using this form of alternative dispute resolution.”

Unfortunately, he said, “we have yet another example of an unelected, politically motivated, single director choosing what he thinks is best for the American consumer. Today’s proposal is a clear win for class-action trial lawyers who reap unseemly recoveries, while consumers recover pennies on the dollar. This is a clear endorsement by the Bureau of one form of dispute resolution over another.”

— Check out CFP Board’s Mandatory Arb Plan: Significantly Better Than FINRA’s on ThinkAdvisor.


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