On Wednesday, October 7th, the CFPB announced it is considering a proposal to ban mandatory pre-dispute arbitration clauses in consumer contracts that require a consumer's claims to be arbitrated separately and severally.  Over the years, creditors have developed arbitration clauses that require claims between consumers and creditors to be arbitrated, and that limit such arbitrations to individual actions as opposed to class-wide arbitration.  In other words, consumers can't join with others similarly situated to pursue claims together.  Consumer advocates and others have argued that such contractual provisions frustrate consumers, prevent remedial class action, and unfairly protect bad-actors.

Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act specifically mandates the CFPB to conduct a study—which it has (as we discussed here)—and if the Bureau finds that prohibiting or limiting arbitration “is in the public interest and for the protection of consumers” then it may adopt a rule consistent with the study's findings.  

The March, 2015, study by the CFPB analyzed

  • Over 1,800 consumer finance arbitration disputes filed over a period of three years;
  • A sample of nearly 3,500 individual consumer finance cases filed in federal court over the same three year period; 
  • All of the 562  consumer finance class cases filed in federal court and in selected state courts during the same period;
  • 40,000 small claims filings over the course of a single year;
  • More than 400 consumer financial class settlements in federal courts over a period of five years; and
  • More than 1,100 state and federal public enforcement actions relating to consumer finance.

According to the CFPB, the study results prove that consumers are adversely served by limiting their access to class action litigation.  The full study is available for review at http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/.

The new Outline of Proposals found at http://www.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf would not ban mandatory, pre-dispute arbitration clauses entirely.  Rather, the CFPB proposes that arbitration clauses in consumer finance contracts would have to explicitly say that they do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court.

The arbitration procedure for individual claims is not left entirely alone in the Proposal.  The CFPB is also considering mandating that companies that use arbitration clauses for individual disputes, submit to the CFPB the arbitration claims filed and awards issued.  Also, the CFPB is considering as part of the Proposal, the publishing of the claims and awards on its website.

The CFPB's Outline of the Proposal to address arbitration is the first step in the rulemaking process.  The next step is to convene a Small Business Review panel to gather feedback from interested parties. Once that is done, then the CFPB would adopt a Rule to become operative no earlier than 180 days after the effective date of a final rule.  The CFPB contemplates setting an effective date of 30 days after the rule is published, thus giving creditors 210 days after a rule is published to make changes to form contracts.

But, it is clear that this is the beginning of the end for certain arbitration clauses in consumer contracts.