As we predicted in SAA 2016-15, the Consumer Financial Protection Bureau (“CFPB”) used a “field hearing” on arbitration on May 5th in Albuquerque to release news that it will be moving ahead with rulemaking that will ban class action waivers in consumer financial arbitration clauses.
The field hearing announcement stated: “The hearing would feature remarks from CFPB Director Richard Cordray as well as testimony from consumer groups, industry representatives, and members of the public.” We guessed that, although the announcement was vague as to substantive specifics, the Bureau would announce that it is moving ahead on a rule filing to ban class action waivers. Recall CFPB’s previously-announced intention to propose rulemaking. We also noted that the CFPB in the past has used field hearings to make major announcements. Turns out we were right.
Rulemaking Coming to Ban Class Action Waivers, but PDAAs are OK for Now
In a Press Release issued very early on May 5, the Bureau announced that it is moving ahead with rulemaking banning class action waivers. Says the Release: “The CFPB proposal is seeking comment on a proposal to prohibit companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it.” The proposed rule will not ban predispute arbitration agreements (“PDAAs”), but the latter are not unaffected. “Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposal would provide the specific language that companies must use.” The Bureau cites three main benefits: 1) a day in court for consumers; 2) deterrent effect; and 3) increased transparency. On the latter, the Release says that the proposed rules will also require businesses using PDAAs “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.”
Proposed Reg Does Not Go Far Enough, Group Says
A coalition of more than 160 national and state consumer, labor, civil rights, and employment rights advocates wrote to Director Cordray, suggesting that the class action waiver ban does not go far enough and that the Bureau should also ban mandatory PDAAs in consumer financial contracts. Said the group: “We believe the findings of the CFPB arbitration study offer concrete proof that forced arbitration is causing widespread harm to consumers, and therefore, that it is in the public interest and in the interest of consumer protection to prohibit or strictly curtail the use of forced arbitration clauses in consumer financial contracts. We commend the CFPB for moving forward on a rulemaking to address the public harm caused by forced arbitration, and we urge the Bureau to use its full statutory authority to restore consumers’ right to choose how to resolve disputes with financial institutions under the law.”
Proposed Reg Goes Too Far, Rep. McHenry Says
Shortly before the hearing began, Chief Deputy Whip Patrick McHenry (R-NC), who is Vice Chairman of the House Financial Services Committee, issued a Press Release slamming the proposed rule: "It's the worst kept secret in Washington that the CFPB believes arbitration is harmful to consumers. Thanks to Dodd-Frank, the bureau is empowered to create a deeply flawed and clearly biased study which has now been utilized to write equally flawed and biased regulations that benefit a key Democratic constituency--trial lawyers--not American consumers."
(ed: *In our view, CFPB has it right by focusing on class action waivers. The recently-announced DOL fiduciary rule and long-standing FINRA rules allow PDAAs but ban class action waivers. By taking a consistent approach, the CFPB, in our opinion, increases the likelihood that the rule will be approved without great resistance. **As SAC Board of Editors member George Friedman predicted in his recent guest blog post, “The Mandatory Consumer Predispute Arbitration Agreement – Reports of its Demise May have been Greatly Exaggerated,” CFPB’s approach is very similar to FINRA’s. ***The proposed rule has not yet been published in the Federal Register. ****We will cover the May 5 field hearing in next week’s Alert. *****While we certainly favor the right of companies to use pre-dispute arbitration agreements, we deplore the fact that many wield the PDAA as a weapon to gain a litigative advantage over potential disputants. Our guess, once this CAW ban takes effect, is that a number of financial institutions will now abandon arbitration, instead of recognizing and embracing its virtues.) (SAC Ref. No. 2016-17-01)
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