Big Banks will fight CFPB rules on class action waivers

Posted on: October 19th, 2015 by Steve Larson
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fine printThe financial services industry is already opposing the Consumer Financial Protection Bureau’s moves to restrict arbitration clauses on credit card, bank account and other contracts, and could challenge in court any final rules using recent U.S. Supreme Court rulings and even the Dodd-Frank Act itself against the bureau.

The CFPB earlier this month announced how it intends to restrict mandatory arbitration clauses on consumer financial contracts by barring class action bans that banks and other firms have routinely put into those clauses. Rather than outright eliminating arbitration clauses, the CFPB instead intends to knock out the class action bans. Firms will not have the power to compel arbitration for any consumer who has elected to take part in class action litigation until class certification is denied in the prospective cases or the cases are dismissed.

Although the rule-making process is in its early stages and a final regulation will not come for some time, the industry is already looking at potential challenges.  Given the Supreme Court decisions supporting arbitration in consumer suits that have come down in recent years, the industry believes it will get a sympathetic ear.

The Dodd-Frank Act gave the CFPB the authority to both review mandatory arbitration clauses, which almost always include waivers prohibiting consumers from participating in class action litigation over problems on their credit cards, checking accounts, payday loans or credit reports, and to take action to restrict those clauses if a study determines that they harm consumers.

“Many violations of consumer financial law involve relatively small amounts of money for the individual victim. Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers,” CFPB Director Richard Cordray said at a field hearing in Denver.

The next step in the process is for a small business review panel to look at the CFPB’s plan for eliminating class action bans in arbitration clauses. From there, the CFPB will have to go through the formal proposal process, which can take months.

With the long lead time — even once the rule is finalized, there is a 180-day waiting period before it affects new contracts — banks and other firms will have time to develop a strategy to curtail the rules before the CFPB has a chance to derail arbitration clauses.

The law says the CFPB can regulate arbitration clauses if they are found to harm consumers, and the bureau has put out two separate reports that came to that conclusion. The latest one, released in March, has come under fire from the industry over the statistics that were used to justify its findings.

Given the fierce reaction the industry has had to the CFPB’s initial volley on arbitration, the final rule will likely find its way in court.