The Consumer Financial Protection Bureau (CFPB) released a proposed rule Thursday that would significantly increase consumers' ability to sue banks and other financial service providers. The proposal, which has been highly criticized by the financial industry, would prohibit financial entities from relying on arbitration clauses to block class action lawsuits. According to a CFPB study, the widespread use of arbitration agreements in the financial industry has kept consumers from seeking meaningful relief for legal violations, which is the primary issue the proposal aims to address.

Key Provisions

The proposed rule contains the following substantive limitations on the use of pre-dispute arbitration clauses by providers of financial services:

  • Prohibits providers from relying in any way on an arbitration clause to block a class action lawsuit related to a covered financial product or service. This includes seeking a stay or dismissal of a claim or action, unless and until the court has ruled that the case may not proceed as a class action.
  • Requires that pre-dispute arbitration agreements contain the following provision explaining that the agreements cannot be invoked in class proceedings: 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.
  • Mandates the submission of certain arbitration records to the CFPB when an arbitration claim is filed with respect to a consumer that entered any pre-dispute arbitration agreement after the compliance date.

Note that the proposal would not preclude covered entities from entering into arbitration agreements altogether, or from invoking such agreements to compel arbitration in order to resolve individual disputes.

Industry Concerns

The proposal is troubling for the entire financial industry, as the scope could reach almost any business providing consumer financial products and services. Among those affected are: banks, credit unions, credit card issuers, small-dollar or payday lenders, installment open-end lenders, entities that arrange for consumer loans, loan servicers, debt settlement firms, providers of consumer credit reports and scores, debt collectors, debt buyers and certain payment processors.

One particular concern discussed in the proposal is the effect this rule would have on smaller banks and other small businesses. A small business review panel considered this issue and expressed concern that the proposal would be disproportionately more costly to small entities, which are less capable of handling large litigation expenses. Furthermore, the panel report also indicated that the rule would affect small entities' ability to obtain insurance coverage for class action litigation defense costs, which is already expensive to maintain.

Despite the panel's concerns, at this time, the CFPB believes the proposed rule would not have a significant economic impact on a substantial number of small entities. According to the proposal, small consumer finance entities face class action litigation at lower rates and pay smaller class settlements than larger entities. Moreover, the current proposal already excludes very small entities—those that provide financial products and services to 25 or fewer consumers per year—from application of the rule. The CFPB requests comment, however, on whether the proposed rule should include an exclusion for certain other small entities.

Next Steps

The proposal is expected to take effect next year after a 90-day public comment period and drafting of the final rule. Compliance with the rule is not mandated until 210 days after the final rule is published.

Consider in the meantime whether to add arbitration clauses to any financial services contracts without such clauses currently. Because agreements entered into before the final rule becomes effective are grandfathered under existing law and remain effective going forward, this could successfully limit class action liability in the short run.