CFPB’s Decision Not to Bar Mandatory Arbitration Clauses Implicitly Recognizes Arbitration as Legitimate Alternative to Litigation

There has been much focus over the past years on mandatory arbitration clauses combined with class action waiver provisions that preclude parties from bringing claims on anything other than an individual basis. Earlier this month, in a move to protect consumers, The Consumer Financial Protection Bureau’s Arbitration Field Hearing announced the Bureau’s decision, following a study and report the CFPB published and issued to Congress earlier this year, to launch a rulemaking process to bar class action waivers in combination with consumer financial arbitration agreements,

Here’s what CFPB Director, Richard Cordray, had to say regarding the decision:

After carefully considering the findings of our landmark study, the Bureau has decided to launch a rulemaking process to protect consumers. The proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well. …

 So what does this rulemaking process mean?

To start, the rules wouldn’t ban arbitration clauses altogether. Rather, they would require clauses to state that they don’t apply to cases filed as potential class-action lawsuits unless a judge denies class certification or a court dismisses the claims. Furthermore, the proposals would mandate that companies using arbitration clauses divulge records to the CFPB showing the claims filed by consumers and the awards issued — which may be made available to the public in an effort to ensure fairness and transparency of the arbitration process on behalf of the consumer. Should the proposal be adopted by the CFPB, new rules would apply to financial products overseen by the CFPB, including those cited by CFPB director, Cordray.

Many consumer groups are hailing the CFPB’s efforts as a victory for consumers. Still, the CFPB’s move is expected to face stiff opposition from the likes of the U.S. Chamber of Commerce; the Minneapolis-based Association of Credit and Collection Professionals (ACA International), a membership group of credit and collection industry firms as well as asset buyers, attorneys, creditors and vendor affiliates; and other business groups which, according to a recent New York Times article, maintain that “arbitration offers a more efficient but equally fair means for consumers to resolve complaints. These private proceedings, held outside court, provide the same opportunity for relief without the staggering legal bills, the groups say.”

According to CPR’s SVP of Product Development and Public Policy, Beth Trent, “While it’s difficult to tell the precise impact of the CFPB’s proposed rule, the CFPB’s decision not to bar mandatory arbitration clauses is quite telling. It implicitly recognizes that arbitration is a legitimate alternative to litigation, which is supported by the CFPB’s own data which shows that arbitration is a speedier process than class action litigation, that claim rates in class actions are low, and that average recovery per class member is low.”

“People generally prefer speedy resolution of their claims, and it’s not clear that individuals would necessarily choose to bring a class action,” Ms. Trent added. “That said, lawyers most often initiate class actions with only one, or a few named class representatives, and the vast majority of individuals have no choice regarding whether they are included in a proposed class. In fact, they may be entirely unaware that they are included in a class action at all. Ultimately, the impact of the proposed rule will be shaped, at least in part, by the business response to that rule. Most notably, whether businesses offer arbitration programs that meet standards of due process and consumer needs in a cost-effective manner.”

The next CFPB step is convening meetings of a Small Business Regulatory Enforcement Fairness Act panel, which will review the impact of the proposed regulation on small businesses.  The first such meeting is scheduled for Washington, D.C., Oct. 28, according to the CFPB Monitor, a blog published by the Philadelphia-based law firm Ballard Spahr.