León Cosgrove

CFPB’s Proposed Arbitration Limitations Aim to Restore Consumer Class-Action Relief

By: James R. Bryan

100267765-debt_collection_gettyp.1910x1000In the Dodd-Frank Act, Congress directed the Consumer Financial Protection Bureau (CFPB) to study pre-dispute arbitration agreements and to issue regulations restricting or prohibiting the use of arbitration agreements if the CFPB found that such rules would be in the public interest and for the protection of consumers. Pursuant to that authority, and following an extensive yet controversial study on the issue, the CFPB is now proposing limitations on arbitration agreements for covered providers of consumer financial products and services.

The proposal is based on the CFPB’s preliminary finding that pre-dispute arbitration agreements are being used to prevent consumers from seeking relief from legal violations on a class basis and that consumers generally do not file individual lawsuits or arbitration cases to obtain relief, especially in low-dollar-value cases. In the following, I address a few basic questions about the proposed rule.

1. If this new rule takes effect, what will be the immediate impact on financial services companies?

If the new rule takes effect, the immediate impact will likely be an increase in the number of class action complaints filed against financial services companies. The proposal being considered would not ban arbitration clauses in their entirety but would ban arbitration clauses that prevent consumers from participating in a class action.

Moreover, the current proposal would require financial services companies to include language in arbitration clauses explicitly stating that “[w]e 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.”


2. Which financial products will incur the greatest risk of being targeted in consumer class actions? 

 The CFPB is proposing to cover a wide variety of consumer financial products and services that it believes are in or tied to the core consumer financial markets of lending money, storing money, and moving or exchanging money.

For example, these products and services include: (1) most types of consumer lending (such as making secured loans or unsecured loans or issuing credit cards); activities related to that consumer lending (such as providing referrals, servicing, credit monitoring, debt relief, and debt collection services, among others, as well as the purchasing or acquiring of such consumer loans); and extending and brokering those automobile leases that are consumer financial products or services; (2) storing funds or other monetary value for consumers (such as providing deposit accounts); and (3) providing consumer services related to the movement or conversion of money (such as certain types of payment processing activities, transmitting and exchanging funds, and cashing checks).

It should be noted, however, that the Dodd-Frank Act already prohibited arbitration clauses in residential mortgages.


3. What will be the longer-term impact of removing mandatory arbitration clauses?

Industry groups claim the longer-term impact of removing mandatory arbitration clauses is that the increased costs of class action litigation will be passed on to consumers. On the other hand, consumer groups claim that the potential for class action litigation will ensure that businesses are held accountable and will comply with the law.

Considering its implications, the new CFPB rule will likely face immediate legal challenges based on recent U.S. Supreme Court precedent, such as AT&T Mobility v. Concepcion, as well as challenges to the CFPB’s authority to establish such a rule.


4. What should financial services companies do right now?   

Financial services companies should start preparing now and be aware that the proposed rule would require providers to insert language into their arbitration agreements to explain the effect of the rule. Companies should determine whether any of their activities are covered by the proposed regulation and review the arbitration provisions in their existing contracts. Financial services providers should also consider whether to participate in the public comment process on the proposed rule.

As currently worded, however, the CFPB’s proposed rule will only apply to agreements entered into after the rule takes effect, which will be 30 days after final publication in the Federal Register. Thus, the rule is not expressly grandfathered into prior contracts, and companies should be afforded sufficient time to adjust their standard agreements.


JimBryan_BW_webJim Bryan is a partner at León Cosgrove who represents plaintiffs and defendants in complex commercial litigation matters– including class actions– across the country.