On May 5, 2016, the CFPB announced proposed rules that would further restrict the ability of financial institutions to enter into mandatory arbitration clauses with consumers, including an outright ban on provisions that would prohibit consumers from pursuing class actions in court. The proposed rules do not forbid all mandatory arbitration clauses, however. Financial institutions would still be permitted to require consumers to arbitrate individual claims.

These new rules would be issued under express authority granted the CFPB under the Dodd-Frank Act. Nevertheless, the rules are almost certain to face significant legal challenges, so this announcement may not be the final word but rather the precursor to decisive legal battles that lie ahead.

The CFPB claims that the proposed rules are in response to a 2015 study which showed that few individuals consider bringing lawsuits against financial institutions. The CFPB contends that the study found that class actions provide a more effective means for consumers to challenge financial institutions. CFPB Director, Richard Cordray, stated that “the essence of the proposal issued today is that it would prevent mandatory arbitration clauses from imposing legal lockouts to deny groups of customers the right to pursue justice and secure meaningful relief from wrongdoing.” This statement contradicts previous data revealing that arbitrations benefit consumers by providing quicker relief than that possible through courts.

The proposed rules are expected to take effect 30 days after the final version is published and will apply only to agreements executed 180 days after the effective date of the rules. The rules would apply to most consumer financial products and services that the CFPB oversees, including those that involve lending money, storing money, and moving or exchanging money. Consumer-facing businesses not within the jurisdiction of the CFPB are not directly affected by this rule, although business partners might be. For example, a seller of goods might not be subject to the rule, but a company providing financing for the purchase would be. While the rules would only apply to new contracts, it requires such contracts to include a clause that explicitly states that the contract cannot prohibit a consumer from being part of a class action in court.

The proposed rules would also require companies with arbitration clauses to submit to the CFPB claims, awards, and related materials that are filed in arbitration cases. According to Director Cordray, this allows “better monitoring of consumer finance arbitrations to ensure the process is fair for individual consumers.” The rules would also allow the CFPB to determine if it would like to take further action against financial institutions based on the allegations raised by consumers in these individual arbitrations.

The proposed rule, if it holds up against challenges, may end up largely eliminating arbitration as a method to resolve consumer complaints. The prohibition on class action waivers and the additional burdens imposed on clauses requiring individual arbitration reduces the benefits of arbitration to companies and runs up costs. Mandatory arbitration clauses have already been banned in the consumer mortgage market.

Many legal commentators expect that the CFPB’s rules will be challenged in court, with the ultimate validity perhaps turning on the quality of the CFPB’s study and analysis of the issues. Troutman Sanders has been following the CFPB’s slow-moving examination of arbitration clauses herehere and here, and will continue to keep close watch on developments.

Troutman Sanders advised clients both within and outside the CFPB in developing and administering consumer arbitration agreements, and has a nationwide defense practice representing financial institutions and other consumer facing companies in a plethora of types of class actions and individual claims.