New Consumer Financial Protection Bureau Rule Bans Class Action-Killing Arbitration Clauses

The Consumer Financial Protection Bureau (CFPB) today issued a new rule banning banks and credit card companies, as well as other groups who offer financial products, from wielding arbitration clauses—a means large companies often use to prevent customers from filing class action lawsuits to settle disputes—as a condition for consumers looking to open new accounts. The rule is set to take effect 60 days following its publication in the federal register and covers contracts entered into more than 180 days after that time.

In a press release, the CFPB explained companies often use arbitration clauses to “sidestep” the court system, and thereby also dodge sometimes exorbitant legal fees and payouts for consumers. The CFPB—who some argue is the last government institution truly looking out for consumers—said its new rule will “restore the ability of groups of people to file or join group lawsuits,” as well as force companies to make some substantial changes to their policies going forward.

“People who would otherwise have to go it alone or give up, will be able to join with others to pursue justice and some remedy for their harm,” the CFPB said on its blog.

The CFPB included a one-minute video (below) to help explain the background behind its latest directive:

A draft of today’s final rule, which will most certainly come under heavy fire from Congressional Republicans and markedly pro-business Trump Administration, was first released under former President Barack Obama in 2016. [Ed. Note: As this post was being finalized, Senator Tom Cotton (R-Arizona), citing a potential uptick in “frivolous lawsuits” purportedly linked with pro-consumer regulations, announced he had begun the process to rescind the CFPB’s rule outlawing mandatory arbitration clauses in customer contracts.]

What’s the big deal about arbitration clauses?

Arbitration clauses require consumers to handle small-dollar disputes against large companies on an individual basis. More specifically, consumer-versus-corporation disputes in need of resolution are, in most cases, brought before a private individual, called an arbitrator, who’s totally separate from our courtroom judicial system. When a consumer enters a binding arbitration agreement, he or she thereby waives his or her right to file or join a class action lawsuit. In many instances, arbitration clauses are used for leverage, a condition upon which a consumer agrees to in exchange for the ability to use a company’s services or create an account.

Did the CFPB just outright ban arbitration clauses?

No. It’s important to note, here, that the CFPB’s rule does not ban arbitration clauses entirely, which some hoped the agency would do. Companies are still allowed to include arbitration clauses in contracts (the only industry in which they’re banned is in the residential mortgage market), but those who fall under the CFPB’s oversight will not be allowed to use arbitration clauses as a way to prevent consumers from participating in or bringing group legal action. Further still, companies who wish to include arbitration agreements in contracts once the new rule takes effect will now need to use specific language, the CFPB added. 

Why did the CFPB issue this rule?

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB must study how corporations are using mandatory arbitration clauses in consumer financial markets. Through the same law, Congress also granted the CFPB permission to issue regulations “in the public interest” based on its research findings.

The study behind the CFPB’s arbitration-killing rule, the findings of which were first released in 2015, showed that “credit card issuers representing more than half of all credit card companies and banks” making up 44 percent of insured deposits made customers agree to mandatory arbitration clauses. Three out of four consumers surveyed, the CFPB found, were not even aware if their credit card agreements had arbitration clauses.

What does this rule hope to accomplish?

This rule restores consumers’ right to bring or join class action lawsuits while, in theory, deterring corporations from wrongdoing. Moreover, the rule aims to make the individual arbitration process more transparent by requiring companies to submit to the CFPB records of claims, counterclaims, answers to both, and any awards issued through arbitration. The CFPB said it hopes its collection of this data will help the agency better understand and oversee arbitration, focusing particularly on whether the process itself is fair.