The Consumer Financial Protection Bureau released a proposed rule last week that would prohibit providers of consumer financial products and services from using pre-dispute arbitration agreements to prevent consumers from filing a class action.  In its press release announcing the proposed rule, the CFPB used strong language to condemn mandatory arbitration provisions as permitting “companies [to] sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers.”  Conversely, in a statement issued by the U.S. Chamber of Commerce, Travis Norton and Matt Webb responded on behalf of industry by suggesting that the CFPB’s rule proposes to “replace arbitration — a consumer friendly system that is fast, convenient, and inexpensive — with America’s broken class action system,” which would be “great for class action plaintiffs’ attorneys but a bad deal for consumers.”

Section 1028 of the Dodd-Frank Act authorizes the CFPB to “prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”  That same section also requires the CFPB to study and provide a report to Congress on the use of pre-dispute arbitration agreements in contracts for consumer financial products and services, which it issued to Congress in March 2015.   Based on the results of that study and “its experience and expertise,” the Bureau made five initial preliminary conclusions to support the proposed rule:

  1. the evidence is inconclusive on whether individual arbitration conducted during the Study period is superior or inferior to individual litigation in terms of remediating consumer harm;
  2. individual dispute resolution is insufficient as the sole mechanism available to consumers to enforce contracts and the laws applicable to consumer financial products and services;
  3. class actions provide a more effective means of securing relief for large numbers of consumers affected by common legally questionable practices and for changing companies’ potentially harmful behaviors;
  4. arbitration agreements block many class action claims that are filed and discourage the filing of others; and
  5. public enforcement does not obviate the need for a private class action mechanism.

Based on these initial conclusions, the proposal would prohibit subject companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits.  Companies would generally be required to use the following language in pre-dispute arbitration agreements:

“We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

In addition, the rule would require providers to submit arbitral records to the Bureau within 60 days of filing a claim to arbitrate, thus permitting the Bureau to monitor arbitration proceedings directly in such a way that it has not been able to before.  The proposed rule will be published in the Federal Register shortly and stakeholders will have 90 days after publication to submit comments.