CFPB Proposes Prohibiting Mandatory Arbitration Clauses

May 10, 2016

The Consumer Financial Protection Bureau (CFPB) on May 5 proposed rules that would prohibit mandatory arbitration clauses in new contracts that block groups of their customers from suing them.

According to the bureau, the proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Groups of consumers would have the opportunity to obtain relief from the legal system, and many companies would be incentivized to comply with the law to avoid group lawsuits. Also, the Bureau would be able to monitor the individual arbitration process, providing insight into whether companies are abusing arbitration or whether the process itself is fair.

The rule only applies to certain classes of providers (primarily creditors, servicers, payment processers, debt collectors and creditor report companies). The rule explicitly states that services outside the bureau’s scope (insurance) or not specifically listed (real estate settlement services) are not part of the rule.

The proposed rules should have minimal impact on the arbitration provision in title insurance policies. Due to ALTA lobbying efforts in 2009-2010, "the business of insurance" is not considered a consumer financial product or service under Dodd-Frank and is outside the bureau's scope except as specifically outlined in RESPA and TILA. While the CFPB does have authority to regulate real estate settlement services, ALTA is not aware of widespread use of arbitration clauses in these agreements.

From an industry perspective arbitration is a helpful tool because it is typically less costly, takes decisions out of the hands of juries and puts them in the hands of more impartial and less inflamed arbiters and can help limit spurious class actions suits by making them more costly for plaintiffs.

A CFPB study released in 2015, showed that very few consumers ever bring  individual actions against financial service providers either in court or in arbitration. The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies. According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct.  The study showed that at least 160 million class members were eligible for relief over the five-year period studied. Those settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses. However, where mandatory arbitration clauses are in place, companies are able to use those clauses to block class actions.

The Dodd-Frank Act mandated the CFPB to review the affect of arbitration clauses on consumers.

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