As Chico Marx once said to his brothers in a movie, “There ain’t no sanity clause.”
Is that the headline for July 10? No more arbitration, but lots of lawsuits? And, as a result, higher fees for consumers levied by cautious lenders, when they lend at all?
Well, then, where’s the sanity clause?
The Consumer Financial Protection Bureau (CFPB) has handed down a controversial ruling stating companies cannot opt to use arbitration clauses in their contracts with consumers in a manner that keeps consumers from joining class action lawsuits.
As the rule takes effect in 60 days, the financial industry has two months to gird its proverbial loins. The rule begins applying to agreements and contracts 180 days later.
The decision had been widely anticipated, but still sent shockwaves across the financial and payments landscapes. Banks and credit card companies now find themselves more likely to be targeted by class action lawsuits stemming from customer complaints.
Those legal mechanisms were largely sidestepped by deploying arbitration clauses, which made individual lawsuits the default legal tactic of choice when and if consumers opted out of arbitration, promoting a culture of settlement over litigation.
"Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong," said Richard Cordray, director of the CFPB, in a CFPB statement detailing the rule. "These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
The rule mandates firms write clauses that leave the door open for consumers to join class action suits, and which also stipulate financial companies disclose "initial claims and counterclaims, answers to these claims and counterclaims and awards issued in arbitration.” Further, the CFPB will seek data related to “correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards.”
Both sides of the debate weighed in with speed.
“The CFPB’s brazen finalization of the arbitration rule is a prime example of an agency gone rogue," said David Hirschmann, director of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness. "CFPB’s actions exemplify its complete disregard for the will of Congress, the administration, the American people and even the courts."
Brian Tate, president and CEO of the Network Branded Prepaid Card Association (NBPCA), had a similar reaction.
“The CFPB has ignored its own research and gone forth with a rule which will not only harm the prepaid industry, but will more critically deprive consumers of an efficient, inexpensive and convenient manner [in which] to resolve disputes," said Tate. "The Bureau’s final rule does not adequately consider the costs of its proposal on consumers or financial services providers. According to the bureau’s own research, arbitration has proven to be a faster and more affordable alternative to class action litigation, which doesn’t always benefit consumers and is not always available for all claims.”
The referenced studies and research harken back to 2015 when the CFPB initially proposed its rules. The agency said it had been charged with studying the clauses and their impacts across all manner of lending, from credit cards to auto loans. Back then, the CFPB stated that “tens of millions” of consumers were tied to those clauses, including 53 percent of the credit card market and 44 percent of the checking account industry.
At issue now: Who bears the cost for increased legal wrangling? This may fall to the companies themselves, which means higher costs for consumers. After all, the immediate upshot will be one in which the doors are opened for more suits to be filed, perhaps over rather trivial amounts. Legal teams will be staffed because lawsuits need answering — or beget countersuits — and take a long while to resolve, in many cases. It might not be too farfetched to assume lenders will cast an ever-warier eye toward credit risk, and now perhaps must factor in litigation risk.
It’s worth noting that none, other than the National Association of Consumer Advocates — which counts more than 1,500 attorneys amid its roster — like the CFPB rule, despite the organization calling it a “common-sense solution.”
Though the CFPB has been charged with protecting consumers, reality has conflicted with the organization's noble aims. The fact remains that innovation gets stifled when firms are constantly looking over their shoulders. Credit card issuers, to name just one group affected by Monday’s mandate, might find it even tougher.
As PYMNTS’ CEO Karen Webster wrote back in October 2015, yes, there have been “overly aggressive” issuers that have gotten away with alluring marketing and who have charged high rates for lending.
But the ruling on arbitration paints the industry with a broad brush, and perhaps too broad a brush. Rules currently in place have made it harder for smaller businesses to gain access to the credit they need to run operations and expand them, and individuals have had a similarly tough time.
Are there some subsets of the borrowing pool that are more likely to sue than others? Will capital constraints materialize as lenders reserve funds in the wake of large class action suits? Will fees charged to consumers increase to cover these extra costs? After all, costs have to be passed along somehow, and you can bet they will be — perhaps to the detriment of the very people the new CFPB rule is designed to aid.