WASHINGTON— The CFPB has announced a new rule that bans the use of mandatory arbitration clauses it says “deny groups of people their day in court.”
In particular, in releasing the rule the CFPB cited financial products such as credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing.
Many credit unions have such clauses included in their own credit card rules, and CUNA called the ruling a “disappointment.”
The CFPB said it received more than 100,000 comments prior to publishing its final rule.
“By forcing consumers to give up or go it alone – usually over small amounts – companies can sidestep the court system, avoid big refunds, and continue harmful practices,” the agency said.
The CFPB said its new rule will deter wrongdoing by restoring consumers’ right to join together to pursue justice and relief through group lawsuits.
"Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong," said CFPB Director Richard Cordray in a statement. "These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
According to the CFPB, “hundreds of millions of contracts” for consumer financial products and services have included mandatory arbitration clauses. The CFPB said such clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for individual cases brought in small claims court. “While these clauses can block any lawsuit, companies almost exclusively use them to block group lawsuits, which are also known as “class action” lawsuits. With group lawsuits, a few consumers can pursue relief on behalf of everyone who has been harmed by a company’s practices,” said the CFPB. “Almost all mandatory arbitration clauses force each harmed consumer to pursue individual claims against the company, no matter how many consumers are injured by the same conduct. However, consumers almost never spend the time or money to pursue formal claims when the amounts at stake are small.”
CUNA 'Disappointed' By Proposal
In response, CUNA CEO Jim Nussle issued a statement saying, “CUNA is analyzing the CFPB’s final rule on arbitration. We are disappointed that the CFPB continues to apply new rules on credit unions when there is no evidence of consumer abuse by credit unions and as financial institutions that are member-owned, credit unions have a long history of working with their members to resolve disputes. The additional regulatory burden imposed on credit unions in response to abuses by other financial services providers further rigs the regulatory scheme in favor Wall Street banks and other abusers of consumers and does credit union members an incredible disservice.”
CUNA filed a comment with the CFPB asking the Bureau to consider the different structure and dispute resolution process at credit unions.
What CFPB Study Found
The new rule follows a study released by the CFPB in March 2015 that found credit card issuers representing more than half of all credit card debt and banks representing 44% of insured deposits used mandatory arbitration clauses. The same survey found three-out-of-four consumers the Bureau surveyed did not know whether their credit card agreement had an arbitration clause.
“These clauses are not only common and unknown, they are also bad for consumers,” the CFPB said.
According to the CFPB, by blocking group lawsuits, companies are able to:
- Deny consumers their day in court
- Avoid paying out big refunds studied, arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.
- Continue harmful practices.
The CFPB said its new Arbitration Rule restores consumers’ right to file or join group lawsuits and also deters companies from violating the law. “
The CFPB further said the new rule also makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.
The Bureau said it will collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards.
The rule’s effective date is 60 days following publication in the Federal Register and applies to contracts entered into more than 180 days after that.
More information on the rule can be found here.
A CFPB video explaining the arbitration rule is available at https://youtu.be/boQ2tRW_AwE