On May 5, the Consumer Financial Protection Bureau (CFPB) dealt another blow to the financial services industry. The CFPB issued a 377-page proposal that would effectively block the use of mandatory arbitration clauses that have come to be the norm in most financial agreements. As the CFPB is quick to point out, the proposal does not ban arbitration clauses entirely, but merely requires that consumers be provided other options for dispute resolution. This is precisely what gives the proposal its real teeth. These clauses not only mandate arbitration, but also usually include waivers that require consumers to sign away their rights to bring class action lawsuits. Without arbitration as the exclusive form of dispute resolution, the floodgates to class action lawsuits will be suddenly flung open.
According to the findings from the CFPB’s own three-year study, consumers have been “effectively prohibit[ed]” from bringing the vast majority of potential claims by the industry’s widespread use of arbitration clauses or “contract gotchas,” as it likes to call them.
Because the cost of individually litigating a claim tends to outweigh any benefit that might result, often the only feasible way of bringing a small claim is together with a class of other consumers with the same one. When the CFPB proposal goes into effect, consumers will be able to aggregate tens, hundreds or even thousands of small claims into large class action suits.
Although arbitration clauses would be banned, generally, the proposal would continue to allow some arbitration at the individual level. In those few cases in which it would be allowed, the bureau has made clear that it will be extensively monitored for abuse.
Besides the added scrutiny, many in the industry have commented that bifurcating the dispute resolution process just isn’t a viable option. With the added costs of litigation and the enhanced scrutiny of what limited arbitration would be permitted, it’s safe to say that most financial companies would simply not be able to afford the two avenues.
There can end up being drawbacks on the other side of the fence, too. There’s a question of whether the bureau has even considered many of the potentially unintended consequences to the consumer. One primary and obvious consequence is that someone has to absorb the increased costs of class action litigation — and, hint hint, it won’t be just the institutions. If institutions have to bear more legal costs, you can be sure that consumers will see correlative price increases.
This is without considering that class actions in general provide little restitution to plaintiffs, but excellent payoffs for plaintiffs’ lawyers. The CFPB’s own study showed that an astronomical 87 percent of class action lawsuits provide absolutely no financial compensation to consumers. The lawyers, on the other hand, can make more than a million dollars per case on average.
Finally, there’s also the lingering question of whether the CFPB even has the authority to impose this unconditional ban on mandatory arbitration. Opposers assert that the Dodd-Frank Act asked for no more than a study on arbitration clauses, while the CFPB claims that Congress also allowed it to reform the practice if “certain conditions are met.” With such wide disparity in the interpretation of the bureau’s authority, legal challenges to the new rule are inevitable.
Although the final rule will go into effect 30 days after being published in the Federal Register, there will be an added 180-day delay period from that date. Based on the current projected timeline, the ban would begin to be imposed on agreements entered into sometime in the middle of 2017, although there is still debate over whether some current agreements would be grandfathered.
Read the full proposal here: http://files.consumerfinance.gov/f/documents/CFPB_Arbitration_Agreements_Notice_of_Proposed_Rulemaking.pdf.
Victoria
E. Stephen serves as associate general counsel for Compliance Alliance. She
holds a bachelor’s degree in business administration in banking finance from
the McCombs School of Business and continued her education at the University of
Texas School of Law. Stephen has worked in corporate tax law, mergers and
acquisitions, and performed legal research on a range of regulatory issues. As
one of Compliance Alliance’s hotline advisors, she helps members with a variety
of compliance and regulatory questions.
BancServ
Endorsed Partner Compliance Alliance offers a wide variety of compliance
support solutions. To find out how to put them to work for your bank, call 888-353-3933,
visit compliancealliance.com or email info@compliancealliance.com. To learn
more about BancServ Endorsed Partners, contact Jim Seay at 850-224-2265 or
jseay@floridabankers.com.