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 – in particular, those that would limit consumer class relief – CFPB Director Richard Cordray recently elaborated on the CFPB’s goals in a speech to the American Constitution Society.

As we previously reported, the CFPB announced its intention to explore rulemaking to ban arbitration clauses in consumer contracts that are aimed at avoiding class actions. Although Cordray explained that the proposed rule would not completely ban all “pre-dispute” arbitration clauses, it would prohibit the enforcement of such arbitration clauses in cases brought on behalf of a putative class, at least until class certification is denied by a court, or the class claims are dismissed.

In his speech, Cordray noted that pre-dispute arbitration clauses have been on the CFPB’s radar since day one because “though they are nearly invisible to most people, they are having profound effects on American life.” He explained that Congress sought to confine the reach of arbitration in the Dodd-Frank Act by directing the CFPB to study and report to Congress on the use of arbitration clauses in consumer contracts and providing that the CFPB can issue regulations prohibiting or imposing limitations on the use of arbitration clauses.

Cordray also discussed his observations on the CFPB’s study on the use of arbitration clauses in consumer contracts, noting that very few consumers used the arbitration procedures or even small claims court to obtain redress for individual claims of less than $1,000. In contrast, Cordray believes that class actions created a mechanism to bring relief to consumers either unaware of the violation of their rights or unwilling to proceed on low dollar value claims. Based on these findings, the CFPB’s proposed rulemaking will be aimed at prohibiting companies from using arbitration clauses to avoid class actions. The tenor of Cordray’s speech endorsed class action litigation as opposed to the use of government enforcement to regulate consumer financial institutions. In closing, he commented that “nobody should have to rely on the government first deciding to pursue an enforcement action in order to get their money back and hold others accountable.”

Cordray did not specifically address the criticism directed at the CFPB’s study on arbitration, such as the working document entitled The Consumer Financial Protection Bureau’s Arbitration Study: A Summary and Critique, which was issued by law professors from the University of Virginia School of Law and George Mason University School of Law. That criticism has highlighted the absence of data on settlement in arbitration and the lack of a discussion on the public policy issues concerning whether disputes should be resolved on the merits as opposed to inducing large payments to class action attorneys’ fees in order to avoid the substantial costs to defend class actions.

In addition to requiring any arbitration clause to explicitly state that it does not apply to cases brought on behalf of a class, Cordray discussed the proposal seeking to require companies to send to the CFPB all initial claims and awards in consumer financial arbitration disputes. Cordray explained that making the individual arbitration disputes public may inform other consumers of potential violations and expose companies to public scrutiny.