The Equifax Data Breach Might Have Secured the Future of the CFPB’s Mandatory Arbitration Rule
Should consumer finance companies be allowed to use contracts to guard themselves against class-action lawsuits? Before last week, relatively few people outside of the industry felt one way or another.
But on Thursday, the question suddenly became a lot more relevant. On September 7th, Equifax reported that it had suffered a massive data breach: hackers had gained access to the sensitive data of more than 143 million Americans—over half of the U.S. adult population. The stolen information includes individuals’ Social Security numbers, names, home addresses, and even some driver’s license numbers.
Equifax didn’t just drop a bombshell and walk away, of course. To alleviate consumers’ concerns, the credit reporting agency announced it would offer free credit monitoring services. …And then people read the fine print. American Banker reports:
“[K]een observers rapidly figured out that the ‘free’ service came with catch—a mandatory arbitration clauses that would prevent consumers from filing a class action suit against Equifax for using the service. (The arbitration clause would not cover damage from the breach.) The company later changed gears, saying late Friday that customers signing up for the service would not waive the right to a class action suit. But by then the damage was already done.”
Although the CFPB contends that the rule empowers consumers, the issue isn’t so clear in practice, says Michael Semanie, an attorney with Killgore, Pearlman, Stamp, Denius & Squires, P.A,:
“There’s policy issues on both sides for why it would help or why it would hurt consumers to do this. I can tell you from my perspective, the class action waiver is a key to that. Being in arbitration in and of itself, the idea … is that it streamlines the litigation process. Personally, I would prefer to be in court rather than arbitration because it’s a lot easier to get out some of these frivolous suits. You have more procedural mechanisms, more opportunities to get cases resolved quickly, short of trial, than you do in arbitration. Arbitration is a lot more amorphous.”
He calls the arbitration rule the “lawyer’s prosperity rule” because, in his words, “I’m not sure it’s going to benefit consumers as much as it’s going to benefit attorneys.”
“These class actions can be brought by a plaintiff’s attorney, even if the merit is a little bit dubious,” he told us. “Once you’re in a class action, sometimes you can get the defendant to settle for a lot more than they normally would because of that issue.”
In Mike’s perspective, many borrowers wouldn’t choose to take action against credit companies without the option of bringing a class action lawsuit. Most independent claims represent small injuries that, on a case-by-case basis, aren’t worth the legal costs. Through a class action lawsuit, however, a smattering of seemingly frivolous disputes can transform into a massive problem for a lender, since each retail installment contract is identical.
“If there’s an issue on one of them,” Mike told us, “there’s an issue on all of them.”
That said, arbitration isn’t always necessarily a better option. Mike shared a story with our audience about a client who had used the word “loan” in their retail installment contracts. With the company facing a class action suit, Mike compelled his client to argue the issue in court, rather than arbitration:
“The plaintiff was claiming that it was a loan, so it was governed by usury laws. We said, ‘No, it’s governed by the retail installment sale laws.’ And the court agreed with us to get that removed. I can tell you if we were in arbitration, we would still be litigating that issue.”
Regardless of who it benefits, or the likelihood of its passage, the rule should prompt consumer finance companies to review their documents and compliance programs. Mike compared it to the Department of Labor’s Fair Labor Standards Act overtime rule, which was recently struck down by a federal judge but nonetheless motivated companies to take care of unresolved compliance issues:
“[The FLSA rule] benefited them because now they have a better understanding. They may have had to reclassify people that they just didn’t know were mis-classified in the first place. So, the same thing here: it may or may not go into effect, but it’s a good exercise to have someone look over your documents, look over your arbitration agreement; see what’s in there, see what you’re actually getting to do, whether it’s right or not. I’ve seen arbitration agreements that required one particular arbitral tribunal to govern on those, and the tribunal was no longer around. They weren’t in business anymore.”
In other words, keep things up to date. Whether we’re talking about a CFPB publication or a new cybersecurity threat, laws and technologies change all the time. Don’t assume what worked last year is going to continue functioning now and into the future.
It’s another reason to dust off and crack open that binder—or, better yet, ditch the manual processes altogether and adopt an automated compliance solution.