Consumer Financial Protection Bureau News Flash! May 6, 2016

Consumer Financial Protection Bureau’s Newly Proposed Regulations Would Pave the Way for More Consumer Class Action Lawsuits:  Rule Would Mandate that all Mandatory Arbitration Provisions Carve Out the Consumer’s Right to Participate in a Class Action Lawsuit in Consumer Financial Contracts with Most Financial Institutions

May 6, 2016

By: Creditor’s Rights & Bankruptcy Practice Group

The Consumer Financial Protection Bureau (“CFPB”) recently proposed a new regulation that would significantly limit mandatory arbitration provisions in most consumer financial contracts, and that would make consumer class action lawsuits on financial services or financial products easier for consumers to pursue. A mandatory arbitration provision is a contractual agreement to resolve disputes through arbitration instead of in the courts. The CFPB is now seeking public comment on its proposed regulation. In general, the proposed regulation would prohibit most financial institutions from relying on a mandatory arbitration provision in a contract to prevent a class action lawsuit by consumers. Specifically, any contract that contains a mandatory pre-dispute arbitration agreement would be required to include this provision (or an alternative provision for some multi-service contracts):

“We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

If promulgated in its present form, the regulation would only apply to contracts entered into after the effective date of the regulation, and would not be retroactive. This means that financial institutions would not need to send notice to consumers or amend agreements already entered into.

However, the regulation would still have a retroactive impact because it would require a financial services or products provider involved in an arbitration proceeding to submit information about the proceeding to the CFPB. Among other things, the reporting requirement would include information about the substance of the initial claim and any counterclaim, a copy of the underlying contract containing the arbitration agreement, information about the judgment award if any, and communications relating to an arbitrator’s dismissal of a claim for failure to pay arbitration fees or because the arbitrator determined that the mandatory arbitration agreement was unfair to consumers.

The CFPB cites, as the main impetus for the regulations, the need for consumers to join in a class action suit to prosecute a financial institution’s violation of law collectively, especially where each consumer is only harmed by a small amount of money (for example, one mistaken fee charge of $100 or less, but effecting all of the financial institution’s customers). Director of the CFPB Richard Cordray calls such mandatory arbitration agreements “gotcha” clauses that prevent consumers from filing class action law suits against financial institutions. The regulation comes after a CFPB study of arbitration provisions published in March, 2015. That report found that most consumers are affected by mandatory arbitration provisions, that most consumers are not likely to bring claims individually against their financial institutions, and that many consumers may benefit from the class action lawsuit structure.

To see the full press release or to let the CFPB know what you think about the proposed regulation, check out the CFPB website: