CFPB proposes arbitration limits

Rule would stop card issuers from blocking class-action lawsuits


CFPB considers rule limiting mandatory arbitration
CFPB considers challenge to mandatory arbitration

Millions of credit card users and other consumers would get back their right to a day in court under a rule proposed Thursday by the U.S. Consumer Financial Protection Bureau.

The proposed rule would ban financial companies from using arbitration requirements to shield themselves from class-action lawsuits by groups of disgruntled customers.

In individual disputes, companies could still require arbitration instead of court, but would have to open the process to scrutiny by regulators and the public.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” CFPB Director Richard Cordray said in announcing the rule. See "Arbitration rule Q&A"

A pre-dispute mandatory arbitration clause in a contract requires customers to bring gripes about the company to an arbitrator instead of court. Pro-arbitration businesses claim it is cheaper and faster than the court system, which they say benefits trial lawyers more than consumers. The Supreme Court has sided with business and ruled in favor of mandatory arbitration, potentially setting the stage for legal challenges to the CFPB’s rule.

"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," American Bankers Association CEO Rob Nichols said in a statement.


Issuer Arbitration? Opt-out?
American Express Yes Yes
Bank of America No N/A
BarclayCard Yes No
Capital One No N/A
Chase No N/A
Citi Yes No
Discover Yes No
Wells Fargo Yes No
US Bank Yes No
Sources: U.S. Consumer Financial Protection Bureau, research, updated May 4, 2016

But opponents say requiring arbitration gives companies a free pass to ignore consumer protection laws by blocking customers’ path to the courthouse. Arbitration clauses usually forbid group lawsuits or "class actions" as well as individual court cases. That stops. customers from recovering small-dollar violations that are too costly to pursue on an individual basis.

"Banks have been able to blatantly break the law, and their customers couldn’t do anything about it," said Paul Bland, executive director of Public Justice, during a hearing on the rule Thursday in Albuquerque. The legal shield helps small-dollar lenders keep customers trapped in a cycle of debt, he said.

A 2015 study by the consumer protection bureau found that 32 million consumers who were able to participate in class action lawsuits shared in $2.7 billion in refunds and compensation over two years. Only a relative handful participated in arbitration. And most consumers covered by an arbitration clause were unaware that they were blocked from taking the company to court.

About 52 percent of credit card balances at big banks are covered by a mandatory arbitration clause, the agency found. At smaller banks the fraction covered was 31 percent, while few credit unions required arbitration.

Congress considered arbitration important enough to address it specifically in the 2010 Dodd-Frank Act that created the consumer protection bureau. The act requires the bureau to study the effect of arbitration contracts on consumers’ financial well-being, and to regulate the practice if warranted. The act also banned mandatory arbitration in home mortgage contracts.

Limits of the rule
Existing consumer contracts would not be affected by the rule. It would apply only to contracts signed 180 days after the rule’s effective date, which has yet to be set. The CFPB is proposing the effective date be 90 days after the rule is published in the Federal Register, which is expected shortly. Prepaid cards in stores could continue to be sold with their existing terms, as long as new terms that reflect the arbitration rule are issued when the buyer registers the card, according to the proposal.

The rule would apply to lenders, credit card issuers, credit bureaus and other financial sector companies the CFPB regulates, the proposal states. Outside of the agency’s jurisdiction are phone companies, internet providers, home builders, fitness centers and many other nonfinancial companies that use arbitration clauses.

Arbitration still OK, sometimes
Financial companies could also still require arbitration in individual disputes, as distinct from group class actions. However, they would have to open up the formerly nonpublic arbitration process by providing information on the outcomes of the cases to the CFPB. The agency would monitor the fairness of the arbitration process and make the information public, the proposed rule says.

Business advocates predicted that companies will drop mandatory arbitration for individual disputes as well, if deprived of the shield from class actions.

I believe most companies will simply abandon arbitration altogether

— Alan Kaplinsky,
Ballard Spahr

“I believe most companies will simply abandon arbitration altogether,” said Alan Kaplinsky, a corporate lawyer at Ballard Spahr who pioneered the class action ban in arbitration clauses. The cost of maintaining arbitration programs doesn’t make sense for businesses if they are also exposed to class action lawsuits, he said.

In 2015, a panel of small business reviewed the CFPB’s preview of the rule, and issued a report critical of the class action lawsuit system. Costly court cases can result from highly technical violations, such as one company&rsquos use of a smaller type size than required in a disclosure form, the report said. Instead of exposing companies to costly class action lawsuits, the agency should find other ways to enforce consumer protection law, the panel recommended.

Arbitration foes said the rule doesn&rsquot go far enough. The Center for Progressive Reform called for arbitration proceedings to be publicly announced and recorded; a ban on expensive arbitration fees levied on consumers, and the end of prohibitions against appealing an arbitrator’s ruling in court.

“Using financial services like credit cards and loans should not mean giving up basic legal rights,” said Martha McCluskey, a scholar at the center said in a statement accompanying a report on arbitration. The nonprofit research group supports access to the courts, among other causes.

Question: What will the arbitration rule mean for consumers?
Answer: Contracts for credit cards and other financial products will have to drop language that prevents you from joining a class-action lawsuit against the company.
Q: Why does that matter?
A: Exposure to class-action lawsuits can make companies think twice before doing something that harms consumers. The lawsuits can also yield payments to consumers when companies settle, or lose in court.
Q: What contracts are covered by the rule?
A: Financial products including credit cards, auto loans and leases, bank accounts, credit reporting, prepaid debit cards, debt settlement, debt collection, check cashing, student loans, payday lending and money transfer services. Home mortgages are already exempt from arbitration.
Q: When does it happen?
A: The timing isn’t firm yet, but it will take at least nine months for the rule to take effect. The ’s effective date will be 90 days after it is published in the Federal Register, which is expected to happen soon. After the effective date, companies will have six months to drop their arbitration requirements from new contracts. Existing contracts signed before the effective date can keep the requirements.
Q: What should consumers do?
A: Arbitration probably isn’t the deciding factor when you choose a credit card or other financial service. But if you want to, you can replace existing contracts with ones that lack an arbitration requirement after the rule takes effect, probably in early 2017. Depending on the contract you could renew it, or close the affected account and open a new one.


See earlier coverage: CFPB moves toward limits on arbitration

Updated: May 5, 2016

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