CFPB Proposed Rule on Consumer Finance Arbitration
Friday, May 13, 2016

The CFPB’s proposed rule prohibiting mandatory pre-dispute consumer financial arbitration clauses waiving class actions was announced on May 5, 2016.  The public comment period is 90 days.  Providers utilizing arbitration clauses would need to disclose to consumers that arbitration may not be used to prevent participation in class action lawsuits.  And, arbitration may only be resorted to after class claims are dismissed or class certification is denied.  The CFPB also plans to monitor and, potentially, report the results of arbitration so records of the proceedings would need to be provided to the CFPB.

If all this sounds like consumer financial arbitration is a thing of the past, well, it probably is if the rule in its present form is approved, at least insofar as arbitration ever being used again to prevent class actions for the resolution of consumer financial disputes.

The CFPB is constrained to follow Section 1028(b) of the Dodd-Frank Act, which authorizes the CFPB to “prohibit or impose conditions or limitations” on the use of consumer financial arbitration if the CFPB finds such prohibition, condition or limitation to be “in the public interest and for the protection of consumers”, and supported by study and report to Congress.  That Study was completed last year and concluded that class actions provide better relief to consumers than arbitration for the resolution of disputes.  The Study’s actual findings are somewhat at odds with that conclusion, considering that consumers recover, on average, $32.25 from class actions, while arbitration results typically average $5,389 per claim. 

Additionally, the proposed rule would stand in opposition to established law favoring consumer arbitration as the preferred method for the cost effective and timely resolution of financial disputes, which case law is recent and recurring based on the U.S. Supreme Court’s decisions finding the Federal Arbitration Act preempts conflicting state law in 2011 (AT&T Mobility v. Concepcion),  2013 (America Express v. Italian Colors Restaurant), and 2015 (DirectTV v. Imburgia).  To the extent industry is forced to forego arbitration and gear up for expensive class action litigation, those added costs are likely to be passed on to consumers in the form of higher prices and fees since it is unlikely many companies will be able to afford or willing to wage dual-front responses to consumer disputes via arbitration and litigation.  Clearly, those most likely to benefit from class action predominance over arbitration are plaintiffs’ class action attorneys rather than consumers or industry.

A challenge to the rule based on a departure from Dodd-Frank’s required showing that prohibitions, conditions or limitations on arbitration being supported by the Study, and “in the public interest” and “to protect consumers” may be aided by a pending case before the D.C. Circuit Court of Appeals.  In PHH Mortgage v. CFPB, argued April 12, 2016, one significant issue to be decided is whether the single-head CFPB removable by the President only for cause violates the separation of powers doctrine.  A decision is expected sometime soon, likely to be followed by review in the U.S. Supreme Court.


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