CFPB Proposal Prohibits Some Arbitration Clauses

Guest Post by Expert Geoff Winkler

The Consumer Finance Protection Bureau Proposes Rule to Prohibit Some Mandatory Arbitration Clauses Used in Financial Services Contracts

On May 5, 2016, the Consumer Finance Protection Bureau (CFPB) proposed a new rule which would prohibit mandatory arbitration clauses that prevent consumers from filing class-action lawsuits against financial institutions. This proposed rule, much like the proposed NCUA deferred compensation rule we discussed previously, was a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). Under Section 1028(a), Congress required the CFPB to “conduct a study of, and … provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute … in connection with the offering or providing of consumer financial products or services.” The result is a 377-page proposed rule by the CFPB that provides interesting facts and analysis (for legal history buffs) of the evolution of arbitration, and class-action matters citing back to medieval times, old English law and the modern U.S. framework.

Use of Arbitration Clauses

As part of its report to Congress, the CFPB studied the prevalence of arbitration clauses in consumer finance contracts and found that although they are prevalent in some sectors, there are still other areas where arbitration clauses are not nearly as prevalent.

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This is especially true when you look at traditional banking institutions, where only 7.7 percent of checking account contracts contain arbitration clauses, accounting for less than 45 percent of the total percentage of the market.

Why the New Rule?

The CFPB contends that, due to arbitration clauses that prevent class-action lawsuits, consumers may be forced to seek relief on their own instead of joining a class, suggesting that this may be disadvantageous to consumers.

To determine if consumers are somehow disadvantaged in arbitration as opposed to class-action litigation, we looked at the differences in the net benefit awarded in litigation and the amount of time each takes to reach resolution.

Benefits of Class-Action v. Arbitration

The benefits awarded in litigation can be difficult to ascertain given that much of the settlement information is never reported in case filings and most (non-FINRA) arbitration awards are never made public, whereas FINRA awards are. However, there is some information and anecdotal evidence that shows the benefits each option provides.

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Some skeptics question the value associated with a class action, noting low recovery rates even in some high-profile cases. For example, the Wall Street Journal recently ran an article discussing Curt Schlesinger et al. v. Ticketmaster,where class members did not receive a cash settlement, but instead received one discount coupon, valued up to $2.25 each, for each ticket the class member had purchased from Ticketmaster from October 21, 1999 through February 27, 2013, up to 17 total discount coupons. That is less than a ride on the NYC subway – one way. (Cf. Gianzero v. Wal-Mart Stores Inc, defendants settled their case for $8 million with certain plaintiffs receiving $520 and others only $50.)

The CFPB will be accepting public comment on the proposed rule for ninety days after it is published in the Federal Register.

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