October 22, 2015

CFPB Proposes Limits on Companies' Use of Arbitration Clauses

Holland & Knight Alert
Anthony E. DiResta | Brian J. Goodrich

The Consumer Financial Protection Bureau (CFPB) has proposed new rules that would ban companies' use of arbitration clauses that prevent consumer class action lawsuits. The potential new rules, announced this month, would also require companies to report individuals' arbitrations to the CFPB. Companies that offer financial services and products – including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans and installment loans – would be affected. If enacted, these rules will greatly restrict how companies may use arbitration clauses and allow for greater scrutiny by the CFPB.

A recent CFPB study found that most arbitration clauses prevent class actions in favor of individual arbitration. However, the study also found that few individuals ever arbitrate their disputes. The CFPB believes these potential rules will address this disconnect, ensuring that small harms receive sufficient legal attention while also serving to deter bad business conduct.

Additionally, the potential rules would require companies to report individual arbitration to the CFPB, including the nature of the claim(s) and resolution. The CFPB would both analyze the data and publish the reported claims and resolutions on its website. Reporting would provide the CFPB constant data about trends in arbitration and the fairness of the process. Website publication of claims would also allow for the public to become familiar with prohibited business practices.

Impact and Considerations

The potential rules will greatly impact companies that rely on formal arbitration to resolve disputes with individuals. Companies would no longer be able to sidestep consumer class action lawsuits. The new rules, if enacted, could also drive up the costs of arbitration that will be associated with complying with the new reporting requirements. The CFPB is currently seeking input from the public, consumer groups, industry and other stakeholders before starting the formal rulemaking process.

As the CFPB proceeds with its investigative process and before it starts formal rulemaking, companies that offer financial services and products may wish to review their consumer contracts. At this time, companies need to determine if their contracts with consumers contain arbitration agreements that block individual consumers' ability to participate in class action lawsuits or group arbitration. If such blocks to class action lawsuits are in place, companies need to consider their new exposure to class action litigation and be prepared for litigation risks should the CFPB enact the potential rules. 

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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