The Proposed Rule Would Increase Companies' Exposure to Consumer Class Actions

The Consumer Financial Protection Bureau (CFPB) on May 5, 2016, released a proposed rule for public comment that would significantly limit companies' use of mandatory arbitration clauses in contracts with consumers.

The CFPB's proposed rule has two main components. First, the proposed rule would prohibit companies that provide consumer financial products and services from using agreements with consumers that require arbitration of any future dispute between the parties in order to prevent the consumer from filing or participating in a class action. Second, the proposal would require companies involved in arbitrations pursuant to pre-dispute arbitration agreements to submit records relating to the arbitrations to the Bureau.

Findings of CFPB Study

The CFPB's proposed rule follows a CFPB study into the use of mandatory arbitration clauses released a little more than one year ago. The CFPB's study showed that very few consumers ever bring – or think about bringing – individual actions against companies either in court or in arbitration. The study found that class actions, as opposed to arbitration, provide a more effective means for consumers to challenge problematic practices by companies. However, the study found that where mandatory arbitration clauses are in place, companies may use such clauses to prevent consumer class actions. As a result, no matter how many consumers are injured by the same conduct, the CFPB found, consumers must proceed to resolve their claims individually against the company.

In its proposal, the CFPB claims that it seeks to open the legal system to consumers by enabling them to file a class action or join an existing class action. According to the CFPB's study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct.

Proposed Rule Requirements

Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposal, the clauses would have to state explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposed rule would provide the specific language that companies must use.

The proposal also requires companies with arbitration clauses to submit to the CFPB claims, awards and other related materials that are filed in arbitration cases. The Bureau says that this would allow it to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers. The CFPB also announced that it is considering publishing the information it would collect so the public can also monitor the arbitration process.

Comments on the proposed rulemaking will be due to the CFPB 90 days from the date it is published in the Federal Register.