CFPB Publishes Proposed Arbitration Rule; Coins a New Phrase

The Consumer Financial Protection Bureau (CFPB) will hold a field hearing today to discuss arbitration. The hearing will feature remarks from CFPB director Richard Cordray as well as testimony from consumer groups, industry representatives and members of the public. It is set for 11:00am MDT in Albuquerque, N.M. The event is open to the general public, but requires an RSVP. See here for the CFPB announcement on the hearing.

The May 5 field hearing will be the third field hearing that the CFPB has held about arbitration.  The first hearing was held on March 10, 2015 in Newark, New Jersey, and the second was held on October 7, 2015 in Denver, Colorado.

The field hearing coincides with the release of the CFPB’s Notice of Proposed Rulemaking (NPR) on the use of arbitration agreements in certain consumer financial services contracts.

In October 2015, the CFPB convened a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel to review the proposals it was considering.  At that time the CFPB provided the SBREFA panel with an outline of their proposals regarding arbitration.

Among other things, the outline suggested that the CFPB would be proposing a ban on the use of class action waivers in consumer arbitration agreements. The CFPB’s report on the input it received from the SBREFA panel was also made public as part of the release of the proposed rule. The SBREFA report can be found here.

Per the CFPB Press release: “Today the Consumer Financial Protection Bureau (CFPB) is seeking comments on proposed rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court. Many consumer financial products like credit cards and bank accounts have contract gotchas that generally prevent consumers from joining together to sue their bank or financial company for wrongdoing. These widely used clauses leave consumers with no choice but to seek relief on their own – usually over small amounts. With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.”

The CFPB describes the benefits of their proposal:

• A day in court for consumers: The proposed rules would allow groups of consumers to obtain relief when companies skirt the law. Most consumers do not even realize when their rights have been violated. Often the harm may be too small to make it practical for a single consumer to pursue an individual dispute, even when the cumulative harm to all affected consumers is significant. The CFPB study found that only around 2 percent of consumers with credit cards who were surveyed would consult an attorney or otherwise pursue legal action as a means of resolving a small-dollar dispute. With class action lawsuits, consumers have opportunities to obtain relief from the legal system that, in practice, they otherwise would not receive.
• Deterrent effect: The proposed rules would incentivize companies to comply with the law to avoid group lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct. When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers. Further, public attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly.
• Increased transparency: The proposed rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB. The Bureau would also collect correspondence from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct. The collection of these materials would enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.

insideARM Perspective

The ANPR is 377 pages.  The SBREFA Panel report is 261 pages. It will be interesting to see whether the ANPR took anything from the SBREFA panel or whether the CFPB’s proposed rule will simply mirror the proposals suggested to the SBREFA panel back in October. Now that the NPR has been released, best guess at this point is that any final rule would take effect sometime in 2017.

Mandatory arbitration of potential class action claims is a huge issue for all businesses.  insideARM wrote about the impact to the ARM industry in a February 3, 2016 article that discussed two recent cases involving Mandatory Arbitration provisions.

The CFPB proposal fails to address the cost of businesses defending class action cases; costs which are ultimately passed down to the very consumers the CFPB is supposed to represent.

In support of the NPR the CFPB touts a study of the use of mandatory arbitration clauses in consumer financial markets. The study, released in March of 2015, can be found here.

In a study for the Mercatus Center at George Mason University, law professors Jason Scott Johnston and Todd Zywicki provide an overview and critique of the CFPB’s report. The Mercatus study criticizes the CFPB report using primarily evidence supplied by the report itself. The Mercatus study suggests that CFPB’s own findings show that arbitration is relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products, and that regulatory efforts to limit the use of arbitration will likely leave consumers worse off. The Mercatus study can be found here.

Finally, it seems as if the CFPB has engaged the same PR strategist that was used by the FCC last July. The FCC rules were accompanied by much hype surrounding the sinister and inflammatory catchphrases “Robocalls” and “Robocalling.” The CFPB has come up with their own catchphrase to garner consumer support, using the equally inflammatory term “Contract Gotcha” in their press release and public statements. In fact, the secondary headline to the CFPB Press Release is: “Bureau Seeks Comment on Proposal to Ban a Contract Gotcha that Prevents Groups of Consumers from Suing Consumer Financial Companies.” The term is then used twice more in the initial paragraphs. No doubt, that term will be thrown out many, many times throughout the rulemaking process.