CFPB’s New Arbitration Rules Have Their Day In Court

It’s official. The CFPB is moving toward a rule change that will make it much easier for consumers — or more specifically groups of consumers — to take banks and other financial institutions to court as part of class action lawsuits.

The recently unveiled proposed rule change would ban companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits. The proposed rules would also require new reporting guidelines about arbitrations as they happen, including mandatory reporting of the outcomes.

The new rules got its first official public hearing yesterday. Thaddeus King, an officer in the Consumer Banking Project at the Pew Charitable Trusts, was at the CFPB field hearing and spoke with us exclusively. He noted that, by and large, the proposed rule change, particularly the ban on class action waivers as a part of arbitration clauses, was generally popular.

“When we did research, over 90 percent of consumers support the right to go to court and class action and appeals. It wasn’t surprising that the Field Hearing had a pro-CFPB rule feeling,” King told us shortly after.

“There really weren’t any consumers who have spoken out in favor of banning class actions as part of arbitration.”

The rule change, King noted, does not ban arbitration itself — just the inclusion of clauses that force consumers to waive their right to a class action suit, as the CFPB contends that is what harms consumers.

“What can happen with class actions is a consumer class will go and try to sue in court. The bank will go to court and say ‘Well, we have this arbitration agreement,’ and the judge then has to say that it can’t move forward in court, instead that has to be decided by an arbitration.”

There are two problems with this, according to the CFPB.

The first, and King noted this is backed up by research Pew has done, under a certain threshold, no individual in their right mind sues or goes through arbitration.

“The real problem arises where the claim is that many people are harmed but the amount of individual harm is very small. Whether you are talking about a case in court or an arbitration - if you have a claim for a small amount of money it’s probably not going to go forward on an individual basis,” King explained. “It’s too difficult to do, too time-consuming and too expensive. People are not going to sue or go to arbitration for $35 or so — it just doesn’t happen.”

The other problem is that consumers are generally totally unaware of these clauses — or that they could have opted out in some cases — until it is far, far too late.

King says that consumers don’t really understand this since they don’t read the agreements and they are signed when consumers first get the product – well before a dispute. People tend not to think about the problems 3, 5 or 7 years down the road when they are getting a loan or a credit card, he says.

“There are some companies that do allow opt outs on the arbitration agreement; I have done it personally a few times myself,” King said. “But the data indicates it is not very common for consumers to do it. For example, when we researched it, many checking accounts do offer an opt out, but you have to do it within 30-60 days and you have to do it in writing through the mail. If people aren’t sure what arbitration is or why they would need it, they aren’t going to work hard to figure out how to mail a letter to their financial institution.”

And while King — and the consumers he has surveyed — is broadly supportive of the CFPB’s new rules, it has also drawn sharp concerns from the financial industry.

“Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted,” Rob Nichols, president of the American Bankers Association, said in a statement. “The CFPB has chosen to put the future of arbitration at risk by requiring companies to face a flood of attorney-driven class action suits from which consumers receive virtually nothing.”

While the risk that class action lawyers will be taking out a swarm of 1-800-SUE-BANKS ads on TV is a risk that could be one of the unintended consequences of this proposed new rule, King noted that without class actions at least available as a tool, consumers don’t have any ability to protect themselves easily, particularly if the stakes are small.

“It is unwise to send a message to banks that they can break the law and avoid consequences if they amounts are small enough,” King said.

There is a long road still between the draft rules as proposed, including 90 additional days of comment on the rule. After that, there is time between when the draft rule and the final rule is published. After that point, there are 210 days before the rule goes into effect.

And no doubt a spirited debate on the subject will be carried on along the way.



The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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