CFPB Moves Forward With Proposed Rule on Arbitration, Lays Groundwork to Eliminate Arbitration Agreements

The CFPB proposes to prevent companies from using class action waivers in arbitration agreements, and to require companies to submit arbitration information to the CFPB for monitoring and publication on its website.

The Consumer Financial Protection Bureau released its proposed rule prohibiting financial service companies from using mandatory arbitration clauses to block class action lawsuits in new contracts Thursday, despite widespread criticism from ACA International, industry groups, academia and policymakers.

As proposed, the rule has two main parts. First, it would prohibit providers from using pre-dispute arbitration agreements to block consumer class actions in court. Second, the proposal would require providers that continue to use pre-dispute arbitration agreements to submit certain records, such as claims and awards, to the CFPB for monitoring. According to the CFPB, it intends to publish these materials on its website “in some form” in order to provide greater transparency into the arbitration process.

The CFPB states that the rule would apply to providers “in the core consumer financial markets of lending money, storing money, and moving or exchanging money,” including most providers that are engaged in the collection of debt.

“Under the proposed regulation we are releasing today for public comment, companies could still include arbitration clauses in their contracts,” CFPB Director Richard Corday said during a field hearing on arbitration Thursday in Albuquerque, N.M., where the proposed rule was announced. “For new contracts, however, these clauses would have to say explicitly that they cannot be used to stop consumers from grouping together in a class action.”

However, opponents of the proposed rule who appeared on a panel during the field hearing argued that, if finalized, the class action waiver prohibition would effectively result in a de facto ban on arbitration agreements.

“If this becomes final … I believe companies will abandon arbitration all together,” said Alan Kaplinsky, partner at Ballard Spahr, during the hearing. According to Kaplinsky, if the regulation goes through, it would no longer make economic sense for companies to subsidize arbitrations if they will still be exposed to class action risk.

Travis Norton, executive director, Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, echoed this same concern and said the bureau should suspend its proposed rulemaking process while it further considers the impact on consumers and businesses. According to Norton, only 13 percent of class action lawsuit defendants experienced any benefit from their suit, and only 4 percent of that group received any money.

Kevin Hammar, from Alridge, Hammar, Wexler & Bradley, P.A. in New Mexico, representing the New Mexico Credit Union League on the panel, said he is concerned about the “one size fits all” format of the regulation as well as the strain on judicial resources ending arbitration could have. Hammar claimed that smaller financial service providers lack the funds to stay compliant with the regulations the CFPB is proposing.

In July 2012, ACA filed comments in response to the CFPB’s request for information on the scope, methods and data sources for conducting its study of pre-dispute arbitration agreements–which was ultimately used to shape this new proposed rule. In its comments, ACA emphasized that the CFPB must recognize the benefits arbitration provides to consumers compared to formal debt collection litigation which can often be lengthy and expensive. ACA also urged the CFPB to study the impact of revoking the use of arbitration as an alternative to formal litigation to resolve debt collection issues, including whether consumers will suffer higher prices for goods and services if arbitration is no longer a viable alternative to litigation.

The proposal, once published in the Federal Register, is open for comment for 90 days.