CFPB Turns Focus to Arbitration Agreements in Credit Contracts

Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB) is in Dallas today to speak at a field hearing on arbitration clauses in credit contracts. The Bureau also released a report Thursday that showed arbitration clauses are commonly used by large credit card issuers and that roughly 9 out of 10 clauses allow banks to prevent consumers from participating in class actions.

In prepared remarks, Cordray will note that the CFPB wants to explore the arbitration process and the contract clauses that trigger it, as the Bureau views arbitration as “a way to resolve disputes outside of the court system.”

But the CFPB is very concerned that consumers have absolutely no say in arbitration clauses. “Like the other terms of most consumer financial products, they are essentially ‘take-it-or-leave-it’ propositions,” Cordray will say. “Consumers may open a new account or take on a new product without being aware of what the contract says or without fully understanding its implications.”

The CFPB is streaming the field hearing beginning at 11am Central. View it here.

The field hearing, combined with the release of preliminary results of the arbitration study today, signals that the CFPB may be gearing up to write new rules on arbitration clauses.

The preliminary results of the study provided by the CFPB are based on a review of hundreds of consumer contracts, as well as on filings from the American Arbitration Association (AAA). Based on the CFPB’s research, the AAA is the predominant administrator of consumer financial arbitrations in the markets covered by the study to date. The CFPB looked at AAA filings about credit cards, checking accounts, payday loans and prepaid cards between 2010 and 2012. The CFPB observed that fewer than 1,250 consumer arbitrations about those four products were filed. Many of these concerned debt collection.

The debt collection industry is certainly familiar with arbitration issues. Several years ago, a scandal erupted when regulators discovered that National Arbitration Forum (NAF), one of the largest consumer debt arbitration providers, had corporate ties to a collection law firm and agency. The result was the suspension of consumer debt operations by NAF and AAA, and a round of settlements with regulators, including from Bank of America.