In the latest public pronouncement on the Consumer Financial Protection Bureau’s (CFPB’s) intention to engage in rulemaking to ban the use of certain arbitration clauses in consumer contracts, CFPB Director Richard Cordray recently delivered related remarks at a meeting of the Consumer Advisory Board. He emphasized that the proposed rule would not—at least for now—completely ban all “pre-dispute” arbitration clauses, but rather would prohibit only such provisions that prevent group lawsuits such as class actions.

As we previously reported, on October 7 the CFPB announced its intention to explore rulemaking to ban these types of arbitration clauses in consumer contracts.  If enacted, the rule would require consumer contracts for a wide range of financial services and products to explicitly state that their arbitration clauses do not apply to class-action cases, at least until class certification is denied by a court, or the class claims are dismissed.

In his recent remarks, Cordray asserted that the CFPB’s approach is based on findings in its three-year study on arbitration, particularly its conclusion that “very few consumers of financial products and services are seeking relief individually,” either in court or in arbitration. By banning only those arbitration clauses that prevent group actions, the CFPB believes the rule would “deter wrongdoing on a broader scale,” while at the same time making sure consumers “get their day in court.”

However, a closer look at the CFPB’s outline of the proposals under consideration reveals that a complete ban on “pre-dispute” arbitration clauses is still a possibility for the future.  The outline acknowledges that the CFPB did consider banning arbitration agreements entirely; it decided not to do so partly because of the low numbers of disputes filed by individual consumers.  But in rejecting alternative proposals for regulating individual arbitration agreements, the outline forewarns that “further interventions, up to and including prohibiting the use of arbitration agreements in all cases, may become appropriate.”

The CFPB’s proposed rule would further regulate arbitration agreements by requiring companies to submit to the CFPB all claims filed by or against them in consumer financial arbitration disputes. Under this part of the rule, companies that use arbitration agreements in consumer contracts would have to submit initial claim filings from consumer financial arbitrations, as well as any written awards that stem from those filings.  Despite the fact that this could create significant reporting obligations for covered companies, the outline characterizes this requirement as a “minimal regulatory burden” on arbitration activity.  The CFPB also is considering publishing those filings and awards to its website, “consistent with appropriate privacy considerations.”

The CFPB’s stated goal in collecting and publishing this information is to develop data on how arbitration proceedings affect consumer protection, and also to “create more transparency” in those proceedings. But again, the CFPB’s outline notes that this information also will help it decide if a complete ban on arbitration agreements “is needed in the future.”

Other notable portions of the outline of proposals include the following:

  • The proposed rule would include either model or mandatory language for companies to include in arbitration agreements.
  • The proposed rule would permit an arbitration agreement that allows for class arbitration; however, such an agreement still would have to give the consumer the option of pursuing his class action in court.
  • The part of the proposed rule requiring companies to report arbitral filings and awards would not require any changes to the text of companies’ arbitration agreements, would not alter the conduct of arbitration proceedings, and would not impose requirements on the content of written awards.
  • The reporting requirement for arbitral claims would, however, apply equally to individual arbitration proceedings and any arbitration that could proceed on an aggregated basis.