The Consumer Financial Protection Bureau has proposed a new rule that, if adopted, will limit the use arbitration agreements in certain consumer lending transactions. In a nut shell, this rule would prevent the use of arbitration agreements that prevented borrowers from participating in class action lawsuits. The reaction from industry was swift and predictable.
Forbes condemned the proposed rule and stated,”the result of the CFPB’s proposed action will be an onslaught of frivolous class action lawsuits in the finance industry by lawyers seeking a big payday.”
House Financial Services Chairman Jeb Hensarling (R., Texas) called the proposed rule “a big, wet kiss to trial attorneys.” It “essentially hands over the keys of the CFPB’s luxury office building to the wealthy, powerful, and politically well-connected trial lawyer lobby,” he said in a statement.
And, trial lawyers are in fact thrilled:
“It levels the playing field,” said trial lawyer George Zelcs.
A summary of the rule is as follows:
The Bureau of Consumer Financial Protection (Bureau) is proposing regulationsgoverning agreements that provide for the arbitration of any future disputes between consumersand providers of certain consumer financial products and services. Congress directed the Bureau to study these pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Dodd-Frank Act). In 2015, the Bureau published and delivered to Congress a study of arbitration. In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the Study (hereinafter Study), to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers. Congress also required that the findings in any such rule be consistent with the Bureau’s Study.
In accordance with this authority, the Bureau is now issuing this proposal and request forpublic comment. The proposed rule would impose two sets of limitations on the use of predispute arbitration agreements by covered providers of consumer financial products and services.
First, it would prohibit providers from using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into theirarbitration agreements reflecting this limitation. This proposal is based on the Bureau’s preliminary findings – which are consistent with the Study – that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.
Second, the proposal would require providers that use pre-dispute arbitration agreementsto submit certain records relating to arbitral proceedings to the Bureau. The Bureau intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action. The Bureau intends to publish these materials on its website in some form, with appropriate redactions or aggregation as warranted, to provide greater transparency into the arbitration of consumer disputes.
The proposal would apply to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money.