It’s difficult to say just yet who the ultimate victors will be in the battle over arbitration—trial lawyers, consumers, the financial services industry, Congressional Republicans or the CFPB—but the bureau fired the latest salvo by issuing its final rule on arbitration agreements on July 10.
The move comes despite warnings from House Financial Services Committee Chairman Jeb Hensarling (R-Texas) that doing so before providing information on its rulemaking process to the committee could result in contempt proceedings.
Following up on its proposed rulemaking issued in May of 2016, the bureau contends that its final rule will assure consumers “get their day in court,” and will “deter wrongdoing by restoring consumers’ right to join together to pursue justice and relief through group lawsuits.”
The rule prohibits banks and other consumer financial companies from including mandatory arbitration clauses that block group lawsuits in any new contracts after the compliance date—240 days after the rule is published in the Federal Register. (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.)
The rule does not bar arbitration clauses outright and it doesn’t apply to contracts entered into before the compliance date. For these new contracts, however, these clauses have to say explicitly that they cannot be used to stop consumers from banding together to pursue relief as a group. The rule includes the specific language that financial companies must use.
“We are disappointed the CFPB has ignored its own research and gone forth with a rule which will not only harm the prepaid industry, but will more critically deprive consumers of an efficient, inexpensive and convenient manner to resolve disputes,” said Brian Tate, President and CEO of the NBPCA. “The bureau’s final rule does not adequately consider the costs of its proposal on consumers or financial services providers. According to the bureau’s own research, arbitration has proven to be a faster and more affordable alternative to class action litigation, which doesn’t always benefit consumers and is not always available for all claims.”
According to a CFPB study of 562 class actions, the average cash settlement was $32.35 per consumer, and class action litigation took an average of two or more years. In contrast, the average amount received by consumers who prevailed in arbitration was $5,389, with an average arbitration time frame of two to seven months.
But in its announcement about the final rule, the CFPB cited other figures, which it says demonstrate the need for a ban on mandatory arbitration. Group lawsuits, the CFPB said, succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year. More than 34 million consumers received payments and $1 billion was paid out to harmed consumers over the five-year period studied, according to the CFPB. Conversely, in the roughly one thousand cases in the two years that were studied, arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.
“As stated in our August 2016 comment letter, we believe the CFPB has exceeded its authority granted under Dodd-Frank,” added the NBPCA’s Tate. “Moreover, the NBPCA is concerned the downstream impacts of the arbitration rule will be harmful to consumers, causing consolidation and a stymying of innovation in the consumer financial services market, including prepaid card products. This ultimately will lead to less choice and freedom for American consumers. We urge the CFPB to reconsider its rulemaking and the NBPCA will continue to express our concerns and engage stakeholders to address needed changes.”
In prepared remarks announcing the new rule, Director Cordray acknowledged that critics of the rule may seek Congress’ help to undo it. “I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule. That is a process that I expect will be considered and determined on the merits. My obligation as the Director of the Consumer Bureau is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done.”
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