In testimony before the Senate Committee on Banking, Housing & Urban Affairs on July 15, CFPB Director Richard Cordray affirmed the Bureau’s intention to proceed with rulemaking governing arbitration clauses in consumer financial products. Cordray’s comments came in response to questioning from committee member Sherrod Brown, who asked about the CFPB’s implementation of suggestions made in a letter that Brown and 57 other members of Congress sent to the CFPB in March urging it to exercise its rulemaking authority to ban mandatory arbitration provisions in consumer financial agreements. At the hearing, Cordray indicated that the CFPB would proceed “in due course” to convene a small business review panel, the first step in the rulemaking process. The CFPB’s interest in rulemaking in this area follows the Bureau’s release earlier this year of a 728-page report on the use of arbitration clauses in consumer financial products and services contracts, which followed a three-year study of the issue.
But not everyone views the arbitration study’s conclusions as supporting restriction of arbitration clauses in consumer financial agreements. Just days before Corday’s July 15 testimony, several banking industry groups wrote to the Bureau, urging that the CFPB’s arbitration study “supports a conclusion that pre-dispute arbitration clauses benefit consumers and that those benefits should not be restricted or prohibited.” The groups contend that the CFPB’s study demonstrates that arbitration is “faster, less expensive, and more effective than litigation” and that in arbitration “customers are far more likely to obtain a decision on the merits and more meaningful relief.” By contrast, consumer class action litigation commonly results in zero or negligible recovery by class members.
Eighty-five members of congress are also on record criticizing the arbitration study in a June 17 letter, which called the study “fatally flawed” and urged the Bureau “to reopen the study process, seek public comment, and provide the necessary cost-benefit analysis for understanding how a similarly situated consumer would fare in arbitration versus a lawsuit” before engaging in any rulemaking.
Although the CFPB has not announced a timetable for initiation of rulemaking activities relating to arbitration clauses, expect the process to be a contentious one, with significant stakes for companies that regularly enter into consumer financial agreements.