The Consumer Financial Protection Bureau has issued a new rule regarding mandatory arbitration clauses that the bureau said is designed to protect consumers, but is strongly opposed by the financial services industry.
The final rule prohibits companies from using mandatory arbitration clauses in contracts that prevent consumers from joining group or class-action lawsuits to sue their bank or financial institution for wrongdoing.
“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” CFPB Director Richard Cordray said in a July 10 news release. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”
According to the CFPB release, hundreds of millions of contracts for consumer financial products and services have included mandatory arbitration clauses. These clauses typically state that any disputes between the company and consumer will be handled by privately appointed arbitrators, except for individual cases brought in small claims court. Companies often use these agreements to block class-action lawsuits, according to the the CFPB release. By using these clauses, the CFPB contends companies are able to deny consumers their day in court, avoid paying out big refunds and engage in harmful business practices that hurt consumers.
Banking industry reaction
“The bureau has chosen to write a rule that would essentially eliminate arbitration – and force consumers into court – by requiring companies to face a flood of attorney-driven class-action lawsuits from which consumers receive virtually nothing. Under this final rule, consumers lose,” ABA President and CEO Rob Nichols said in a statement.
Independent Community Bankers of America President and CEO Camden Fine said the ICBA is “very concerned” the CFPB’s final rule removes arbitration as a meaningful option for community banks to resolve consumer disputes.
“Arbitration has been a useful and cost-effective tool for both customers and those community banks that use arbitration agreements to settle customer disputes,” Fine said in a news release. “It isn’t economically feasible under the new rule for community banks to continue to pay the costs associated with arbitration for customers if banks are forced to carry the high legal costs associated with class-action lawsuits.
“ICBA is also concerned that the collection and possible dissemination of arbitral data — even if it is anonymized — could lead to the re-identification of consumers and the release of sensitive personal and financial information,” he added.
Under the rule, companies can still include arbitration clauses in their contracts, but companies may not use arbitration clauses to stop consumers from being part of a group class-action. The rule includes specific language companies will need to use if they include an arbitration clause in a new contract, according to the CFPB.
The rule’s effective date is 60 days following publication in the Federal Register and applies to contracts entered into more than 180 days after that.