According to remarks made by Consumer Financial Protection Bureau (“CFPB”) Director Richard Cordray on October 7, 2015 (and a subsequent press release), the CFPB is planning to issue regulations that would prohibit many financial services companies from requiring consumers to waive their right to bring a class action lawsuit via a pre-dispute arbitration agreement and instead pursue claims in arbitration. The agency’s rationale for this coming regulation (described here) is that class action waivers in arbitration clauses give companies a “free pass” when misconduct inflicts small harms on large groups of consumers.

From the CFPB’s perspective, bringing claims in individual arbitrations often makes little financial sense, meaning that claims are not brought at all. In contrast, according to Cordray, class actions have resulted in billions of dollars of recoveries for consumers. Cordray made no mention of the documented flaws of class actions.

In the real word, as the Supreme Court has recognized repeatedly, class actions can be used to extract money from the innocent as well as the guilty.  A company facing a class action can face potentially overwhelming legal liability, as well as huge expense and uncertainty. Given these immense pressures, companies are often forced to settle, regardless of the merits. In the real world, moreover, the biggest beneficiaries of class actions often are not consumers, but rather the burgeoning plaintiff’s class action lawyer industry. The lawyers typically receive thirty percent or more of any recoveries.

The Proposed Regulations

Under the CFPB’s proposed scheme, companies in the financial services industry would not be prohibited from including arbitration provisions in contracts; however, those contracts would be required to contain a provision stating that if the consumer brings a purported class action lawsuit, the arbitration clause cannot be enforced until the court rules against certifying a class or the class claim are dismissed in court. In addition, for the individual claims that are pursued in court, companies would be required to file with the CFPB all claims and decisions in arbitration, which the CFPB will publish.

The regulation would apply generally to the consumer financial products and services that the CFPB oversees – including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, and private student loans, and some other products and services as well.

According to the CFPB, the rules would benefit consumers in a number of ways:

  • A day in court for consumers: The CFPB claims that the proposals would give consumers their day in court to hold companies accountable for wrongdoing. Often the harm to an individual consumer may be too small, according to Cordray, to make it practical to pursue litigation, even where the overall harm to consumers is significant. Previous CFPB survey results reported that only around two percent (2%) of consumers surveyed would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute. The CFPB claims that, with group lawsuits, consumers have opportunities to obtain relief they otherwise might not get.
  • Deterrent effect: The proposals allegedly would incentivize companies to comply with the law to avoid lawsuits. The CFPB argues that arbitration clauses enable companies to avoid being held accountable for their conduct; that makes companies more likely to engage in conduct that could violate consumer protection laws or their contracts with customers.
  • Increased transparency: Undoubtedly, the proposals in the current construction would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit the claims filed and awards issued in arbitration to the CFPB, and the CFPB thereafter would publish them on its website.

Prior Analysis of Arbitration Agreements

As the basis for its regulatory activities in this area, the CFPB cites to its powers under Section 1028(b) of Dodd-Frank to prohibit, condition, or limit the use of arbitration provisions in consumer financial services agreements if it finds that doing so is “in the public interest and for the protection of consumers.” Taking up this mantle, in March 2015, the CFPB announced the release of its report to Congress following the CFPB’s study of arbitration agreements in connection with offering or providing consumer financial products or services. According to the CFPB, the study’s results “indicat[e] that arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions.”

Three years in the making, this report found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for and obtain relief each year through class action settlements. The CFPB’s report also found that more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7 percent of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court.

According to the CFPB, the report results indicated that:

  • Tens of millions of consumers are covered by arbitration clauses;
  • Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets studied;
  • Roughly 32 million consumers on average are eligible for relief through consumer finance class action settlements each year;
  • Arbitration clauses can act as a barrier to class actions through motions to compel arbitration;
  • There is no evidence of arbitration clauses leading to lower prices for consumers and
  • Three out of four consumers surveyed did not know if they were subject to an arbitration clause in their financial services contract.

Bottom Line

The CFPB’s newly-proposed regulations are very likely to be adopted and implemented. While the regulations admittedly do not bar arbitration agreements per se, they will have the ultimate effect of paving the way for more consumer class actions from the plaintiffs’ bar.