It’s no secret that the Consumer Financial Protection Bureau is looking for new areas within financial services and products to police, and one of the bigger targets remains the very way firms address legal disputes with borrowers.
In an effort to shore up what is and what is not on the table with class action lawsuits, CFPB Director Richard Cordray delivered remarks to the Consumer Advisory Board meeting this past week clarifying some of the particulars of the CFPB’s ideas over arbitration.
Cordray reiterated that the rulemaking process remains in effect, centered on what he termed “mandatory pre-dispute arbitration clauses” — tantamount to binding agreements “buried deeply in the fine print” of contracts across financial services, ranging from credit cards to bank accounts.
Cordray said the use of such clauses to preempt class action suits lets firms create “a free pass from being held accountable by their customers in the courts.” Yet, class action suits, he continued, can be agents to provide relief to consumers and also “create the leverage to bring about much-needed changes in business practices.”
As has been previously reported, the CFPB is mulling a proposal that would bar companies from sidestepping group lawsuits through contract clauses. That ban would extend across all manner of financial service offerings, from checking accounts to student loans, auto loans and even payday loans.
Yet, clarified Cordray, a “complete ban” on all pre-dispute arbitration is not in fact in the cards. There still is the possibility for arbitration, but arbitration cannot extend to cases brought via class action — “unless and until” class certification is denied by a court ruling or class claims are eventually dismissed.
To monitor the continuing impact of pre-dispute clauses, Cordray said other proposals under debate within CFPB would mandate that companies send notification and evidence to the bureau of all claims made in consumer financial arbitration disputes. That would extend to written awards tied to those filings. The ultimate goal for the CFPB, according to Cordray, is to find out how such processes affect consumer protection.
In the meantime, the benefits of class action as a legal tool remain threefold, Cordray maintained. First, a group has the ability to pursue and obtain meaningful redress through the legal system that might not be otherwise available. Second, the potential and quite significant burdens of a legal case and adverse judgement can be costly for companies, effectively deterring them from malfeasance. Finally, the specter of public disclosure via the aforementioned filings and awards would do much to keep bad corporate behavior in check.
Now, the question remains: What will really happen? The aim to thwart bad actors in the corporate world is a noble one. But as MPD’s Karen Webster noted recently in her own musings on how the road to inertia is paved with legislation, the CFPB could go to an extreme and choke off at least some initiative for companies to innovate. And that fear of acting, for fear of legal reprisal, could very well extend into the credit realm.
Think of new credit products that could serve new populations or use different metrics (social media comes to mind, as novel conduits of behavioral information that could fill in gaps for lenders looking at prospective borrowers).
Borrowers with weak credit may be frozen out of opportunities to have meaningful financial histories, and lenders would keep looking at the status quo — both in terms of methodology and lending pool. Banks that lend to consumer finance outfits, which extend (relatively high) interest loans to individuals, may tighten the belt a bit as oversight grows draconian. Granted, there’s a long while before proposals become codified and truly change the playing field in credit but expect caution to reign even as the debate rages on.