The CFPB’s Potential Ban on Arbitration Agreements
The Consumer Financial Protection Bureau (“CFPB”) is tasked
with the protection of consumers within the United States. On October
7, 2015, the CFPB released a “potential rulemaking” regarding
pre-dispute arbitration agreements as part of its three-year review of
arbitration clauses. This rule would ban financial companies from using
such clauses to hinder consumers from bringing class action suits, and
would also require financial companies to provide records of their arbitrations.
The CFPB has been reviewing the impact of arbitration clauses for the past
three years. In March 2015, the CFPB released the results of a study,
mandated by the Dodd-Frank Act, and found that arbitration agreements
obstruct consumers from participating in class action litigation, and
that class actions are more beneficial to consumers than arbitration agreements.
Without prohibiting arbitration agreements in their entirety, the CFPB
hopes to address these concerns with its potential rulemaking.
The first rule the CFPB hopes to impose is to ban arbitration agreements
that prohibit consumers from bringing or participating in class action
lawsuits. The CFPB wishes to deter lenders from taking advantage of consumers
by providing consumers with this method of meaningful relief. Also, if
private parties are bringing class action lawsuits, this would take the
burden off of the government’s limited resources in bringing such suits.
The second rule would require lenders that use arbitration agreements to
provide copies of those agreements along with filed claims and issued
awards so that the CFPB can publish the information on its website. The
CFPB hopes that this will allow it to identify trends in arbitration in
the consumer arena, and pressure lenders to be more transparent and fair
The next step for the CFPB will be to have a business review panel to review
feedback and determine what the economic impact of these proposed rules
would be. After the review panel has concluded its research and findings,
the CFPB will put forth a formal rule which will be open for public comment.
Any regulation that does come forth from this will likely go into effect
in 2017 at the very earliest.
This potential rule will likely have widespread effect and will force lenders
to undergo dramatic changes. This rule would affect not only mortgage
lending, but also credit cards, money transfer services, auto loans and
private student loans. What will be interesting to see is the criticism
the CFPB will face. For example, does the CFPB have the authority to ban
arbitration agreements or can this only be accomplished by amending the
Federal Arbitration Act? Not to mention, there will be multiple privacy
concerns as arbitration proceedings contain confidential information.
These challenges will definitely prove to be an uphill battle for the
CFPB over the next few years.