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Paul Zimmerman
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Consumer Agency Proposal Would Expose Banks to More Class Action Lawsuits

Under new rules proposed by the Consumer Financial Protection Bureau (CFPB), consumers would be handed greater ability to bring class action lawsuits against financial institutions and consumer financial services providers. The proposed rules would essentially prohibit the use of mandatory arbitration clauses that contain class action waiver provisions in contracts for consumer financial products and services. The CFPB’s publicized objective is to prohibit consumer financial services providers from using arbitration provisions to prevent consumer class action lawsuits. Covering a range of products, from bank accounts and credit cards to auto and student loans, the rules are ostensibly intended to enable customers to utilize the court system to challenge potentially deceitful practices or other improper conduct. There will now be a 90-day public comment period, which will surely be contentious; the consumer finance industry immediately voiced strong concerns with the CFPB’s proposal.

In recent years, mandatory arbitration clauses have become customary in financial products and services contracts, supported by a series of court rulings that have affirmed the validity of such arbitration clauses and created a strong presumption in favor of private arbitration. Most notably, in a landmark 2011 opinion, AT&T Mobility v. Concepcion, the Supreme Court upheld the use of class action waivers in arbitration provisions in consumer contracts, and declared state law provisions hostile to such provisions pre-empted by federal law. While mandatory arbitration provisions are already prohibited by the CFPB in most residential mortgages and home equity loans, the new proposed rules will expand such protections to cover a broad range of financial products. In fact, the rules would require companies providing such products to insert language into arbitration clauses that explicitly states that the clauses cannot be used to stop consumers from joining a class action. The changes would not apply to existing accounts, though consumers would be free to pay off existing debt and open new accounts that are covered by the new rule.

When Congress approved the Dodd-Frank Wall Street Reform and Consumer Act in 2010, it required the CFPB to study the use of forced arbitration clauses and take appropriate action if those clauses contravened the public interest. Thereafter, the CFPB convened a large, data-driven empirical study, which it released in March of 2015. The study ultimately showed that pre-dispute arbitration agreements “effectively prohibit” class litigation and prevent consumers from obtaining remedies for harm caused by providers of certain consumer financial products or services. Specifically, the study revealed that more than three-quarters of consumers surveyed in the credit card market did not know whether there was an arbitration clause in their contracts. Similarly, fewer than 7% of those covered by arbitration clauses realized that those clauses restricted their ability to sue in court.

The proposed regulation includes two significant limitations on pre-suit arbitration agreements with respect to consumer financial products and services: 1) Providers of covered products and services will be prohibited from relying on any forced arbitration agreement entered into after the effective date of the new rule (211 days after publication of the final rule) to block customer participation in a class action lawsuit; and 2) for any pre-dispute arbitration agreements entered into after the effective date, companies will be required to provide the CFPB with records of all arbitration claims relating to consumer financial products or services filed by or against them, including the arbitration agreement itself, any filings, and the ultimate judgment or award issued by the arbitrator. The CFPB contends this will allow it to monitor consumer finance arbitrations to ensure that the arbitration process remains fair for consumers. The CFPB estimates the additional costs of the reporting requirements to be marginal, even if passed on to consumers.

Companies would still be able to require consumers to enter arbitration to resolve individual disputes. However, in a letter to the CFPB, the U.S. Chamber of Commerce warned that the rule would force companies to stop using arbitration clauses altogether, eliminating an option that is “cheaper, faster and more effective at delivering relief to consumers.” This previews a likely outcome of the proposed rule – the elimination of arbitration provisions, and the inclusion of class action waivers in consumer contracts.  While class action waivers in connection with arbitration provisions have been validated by the Supreme Court, high court guidance on class action waivers outside of arbitration provisions is not as clear. .

The next 90 days should be very interesting, as the two sides square off. However, it is almost certain that a version of the proposed rules will be enacted. Consumer advocates contend that it is in the public interest for consumers to be offered a choice when it comes to pursuing legal remedies against financial institutions, and that mandatory arbitration provisions eliminate or obfuscate that choice. Banks and other financial services businesses counter by arguing that the new rule would effectively eliminate private arbitration in this sector, which is often less costly and more efficient than litigation, and result in a windfall for plaintiffs’ trial attorneys while not actually furthering the interests of individual consumers.

M&R will stay abreast of this issue as the proposed rule is debated and enacted, periodically providing updates regarding the implementation of this likely game-changing regulation. The full text of the proposed rules and the CFPB’s analysis can be found here.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.