CFPB Outlines Initial Plans to Curtail Arbitration Agreements

The Consumer Financial Protection Bureau today unveiled a plan that would prohibit customers from waiving their ability to participate in class action suits and limits drastically the use of mandatory arbitration agreements for financial products and services. Many banks include mandatory arbitration clauses in their credit card and deposit account agreements.

While the bureau says its proposal would not ban mandatory arbitration clauses, it would sharply curtail their usefulness. In addition to prohibiting waivers of participation in class actions, it would also require companies that use arbitration agreements to submit consumer claim filings and written awards to the bureau, which may publish them publicly.

The bureau said it envisions the proposals would apply to all extensions of credit under the Truth in Lending Act and Equal Credit Opportunity Act, automobile leases, depository services under the Truth in Savings Act, payments products and services subject to the Electronic Funds Transfer Act, credit reports and debt collection. The proposal would cover depository institutions and nonbank lenders.

“Arbitration has significant, demonstrable benefits over litigation in general and class action litigation in particular,” said ABA SVP Nessa Feddis, who is following the rulemaking closely. “When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time — and at a fraction of the cost — of expensive litigation, which helps keep costs down for all consumers.”

The bureau said it will next send its proposals to a small business review panel, which may recommend changes before the bureau formally proposes a rule. First Community Bank of Corpus Christi, Texas, was nominated by ABA and selected to be on that panel. The bureau acknowledged that reducing the use of arbitration would increase legal costs and reputational risks for businesses subject to the rule and could increase the cost of credit for smaller businesses if credit is priced to include the risk of class litigation. It is seeking input from the small business review panel on these increased risks and costs.