Since the 1990's, mandatory pre-dispute resolution has been a fixture in consumer credit contracts. This resulted in large part from the ridiculously large verdicts that were being returned by Alabama juries against credit sellers and consumer lenders, for seemingly insignificant and highly technical violations of the law. We had a very active and successful plaintiff's bar that was making life exceedingly difficult for those engaged in consumer finance.
By the mid-1990's, innovative defense lawyers including my law partners, developed the concept that the Federal Arbitration Act, enacted in 1925, could be used in consumer finance contracts to require arbitration of disputes and thereby level the “playing field” between debtors and creditors. Consumers were still entitled to recover for conduct of creditors that violated consumer credit protection laws and regulations, or that was unfair, deceptive or abusive. What consumers and their counsel could no longer effectively do was to hold creditors hostage by the mere threat of expensive litigation before friendly juries.
This concept worked and was sustained by the various courts in the United States including the United States Supreme Court in the case that our law firm defended, Gore v. BMW. And soon, arbitration of consumer finance disputes became the general rule rather than the exception.
As a result of the passage of the Dodd-Frank Act in 2010, the use of mandatory pre-dispute arbitration in consumer transactions has become tenuous. The CFPB was instructed by law to study and evaluate the effect of such mandatory clauses. And, the CFPB has been doing so almost since its inception.
In March of 2015, the CFPB signaled its intent to reign in mandatory pre-dispute arbitration in consumer transactions when it published its study of the subject. Since then, there have been signals that mandatory arbitration of consumer disputes is on its way out.
The CFPB holds yet another public forum on the subject in May. I won't be surprised to see the a Proposed Rule come out of this hearing that announces the intent of the CFPB to suppress the use of mandatory arbitration. If the CFPB stays true to form, it will give creditors a period of time to comply with any Rule that it may adopt.
Readers of our blog may recall that the Department of Defense acted last year to restrict the prohibition on the use of class-wide mandatory arbitration, in “covered loans” to “covered borrowers.” Clearly, the fat lady is tuning up to herald the end of consumer arbitration as we know it.