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05.24.16

CFPB’s Arbitration Proposal Faces Criticism in the U.S. House

US_Capitol_dome_012006The CFPB’s proposal prohibiting financial services firms from including class action waivers in arbitration agreements came under attack last week in the U.S. House.

The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing on the proposal on May 18, with witnesses charging that the rule would lead to “more class actions, higher costs for consumers and reduced access to credit, and new products or services,” according to a committee account. Class action suits can take years to complete and result in settlements involving trivial amounts of money for individual consumers, witnesses said.

Jason Johnston, a professor at the University of Virginia School of Law, told the committee that “attorney fees are rarely less than 75 percent of the total amount paid to the class and often are equal to three or four times that amount paid to the class. This finding indicates that class action settlements are an extremely costly and inefficient way of getting money to class members.”

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. (The study was criticized for its methodology.)

The CFPB proposal would not ban arbitration clauses, but covered institutions would be restricted from including class action waivers in their arbitration agreements and arbitration clauses will be required to contain notices to that effect. When the bureau proposed its rule, Director Richard Corday said: “Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong.”

The bureau had no immediate comment on the recent hearing. In April, officials from 164 consumer, civil rights, labor and community groups voiced support for the CFPB proposal, saying “lenders and other financial services companies use forced arbitration to push consumers out of court and into a private arbitration system that they tilt to favor large financial interests.”

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