The CFPB Is About to Ban Mandatory Arbitration Clauses
There are lawsuits, and then there are class action lawsuits. The former can cause cluster headaches, slow down business growth, and eat away at your organization’s emergency fund; the latter can pose an existential threat.
It’s no surprise, then, that financial service providers frequently minimize their legal exposure by including in contracts clauses that mandate arbitration in disputes with consumers. After all, arbitration tends to cost less overall and conclude faster than the other option: a court battle.
But if a final rule established by the Consumer Financial Protection Bureau moves forward, companies will no longer be able to protect themselves from class action litigation. The arbitration rule is scheduled to become effective on September 18th—but not without a fight with the finance industry and Republicans in Congress first.
Speaking to SubPrime Auto Finance News earlier this month, American Financial Services Association executive vice president Bill Himpler said the industry is “disappointed” with the CFPB’s decision to pass the final rule, and took the bureau to task for apparently acting against its stated mission:
“The bureau has ignored its mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act to limit arbitration only if such a prohibition is in the public interest and for the protection of consumers. … Numerous reports, including the CFPB’s own study, show the value that consumers derive from arbitration, especially when compared to class-action lawsuits. The CFPB’s study clearly demonstrates that the winner in class-action litigation is almost always the plaintiff’s attorneys, who pocket millions of dollars and leave the consumer with little to no financial compensation.”
The rule’s critics include not only finance advocacy groups and anti-regulation representatives, but others in the federal government. In a letter to CFPB Director Richard Cordray, acting Comptroller of the Currency Keith Noreika questioned the bureau’s math:
“As you know, arbitration can be an effective alternative dispute resolution mechanism that can provide better outcomes for consumers and financial service providers without the high costs associated with litigation. … As some have noted, the CFPB’s proposal may effectively end the use of arbitration in cases related to consumer financial products and services. Eliminating the use of this tool could result in less effective consumer protection and remedies, while simply enriching class-action lawyers.
Read “New arbitration rule now on path to be in effect in September” in SubPrime Auto Finance News to learn all about the controversial final rule.
We will continue to cover the CFPB’s arbitration rule through its effective date on September 18th. For more news and perspectives about the CFPB, check out our blog.
