CFPB Considers Ban on Arbitration Clauses

The Consumer Financial Protection Bureau (“CFPB”), the federal agency responsible for regulating the consumer financial industry, appears poised to regulate arbitration clauses that restrict consumers’ relief when a dispute arises between them and their financial service provider.

In recent years, large corporations – particularly those in financial services industries – have been including mandatory arbitration clauses in their customer agreements. These provisions, which are generally buried in the fine print of an already lengthy “take or leave it” contract, often include a class action waiver, which blocks the consumer from bringing a class action – whether in court or in arbitration – to remedy harm suffered by them and other consumers. Because these class action waivers are deliberately designed by financial service providers to block consumers from effectively vindicating their rights, the CFPB is taking a hard look at these contract provisions. While the CFPB is not considering banning arbitration clauses entirely, it has proposed making arbitration clauses inapplicable in cases that are filed as potential class action lawsuits.

The need for the CFPB to intervene is clear. In a recent study published by the CFPB, the agency found that arbitration clauses are pervasive, with tens of millions of consumers covered by such clauses in contracts involving financial services, including credit cards, checking accounts, student loans, and mobile wireless contracts. That study also looked at the number of claims pursued through arbitration or federal lawsuits by consumers against such firms over a two year period, finding that only about 25 cases per year involved consumers’ claims seeking $1,000 or less demonstrating that consumers generally did not seek redress for individual matters that involved small claims. In stark contrast, the CFPB study found that 32 million consumers each year who were not restricted by arbitration clauses were able to join class action lawsuits and therefore were able to obtain redress through class action settlements. These class actions also brought about necessary change to improper business practices, providing consumers with additional valuable relief.

In a recent speech given by CFPB Director Richard Cordray, he recognized that “[b]y joining together to pursue their claims as a group, affected consumers would be able to seek and, when appropriate, obtain meaningful relief that as a practical matter they could not get on their own” and that the proposals the CFPB is considering “would deter wrongdoing on a broader scale.” As Mr. Cordray aptly stated “[c]ompanies should not be able to place themselves above the law and evade public accountability simply by inserting the magic word ‘arbitration’ in a document and dictating the favorable consequences.”

The CFPB has received feedback in response to its proposals and the next step will be for the agency to publish a Notice of Proposed Rulemaking and seek public comment before finalizing the rule.

Trief & Olk, which represents consumers in class actions brought against financial service providers, is encouraged by the CFPB’s actions and will continue to monitor the progress of CFPB’s rulemaking as it unfolds.