The Dodd Frank Wall Street Reform and Consumer Protection act of 2010 has had a profound effect on the banking industry. Among its provisions, Dodd-Frank created the Consumer Financial Protection Bureau, or CFPB. This government bureau is charged with carrying out Dodd Frank’s consumer protection provisions. The director of CFPB announced this month that the bureau plans to introduce rules aimed at restricting the use of pre-dispute arbitration provisions and consumer class action waivers in consumer financial services contracts.
Pre-dispute arbitration provisions in contracts have been an enforceable contractual protection for banks and other companies from tort liability exposure and jury trials since the U.S. Supreme Court decided Circuit City v. Adams, 532 U.S. 105 (2001), that found pre-dispute arbitration agreements enforceable under the Federal Arbitration Act. These agreements are also defenses to consumer class actions after AT&T Mobility, LLC v. Concepcion, 563 U.S. 321 (2011), that held the FAA preempts state laws that attempt to make class action waivers unenforceable. Arbitration clauses in consumer contracts for credit cards are particularly prevalent. Such clauses may soon be prohibited by CFPB.
A recent study released by CFPB concluded that pre-dispute arbitration agreements in consumer contracts tend to place the parties on an uneven playing field to resolve disputes. CFPB also concluded that, even though there are opt out provisions in most consumer agreements, few consumers are aware of this option and thus do not exercise it. The CFPB thus signaled it intends to undertake administrative rule-making to curb or eliminate the practice of writing pre-dispute arbitration clauses into consumer contracts. There are no plans to restrict the use of arbitration clauses in commercial contracts however.
A timeline for the rule making process has not yet been announced. In the typical situation, there is a window of opportunity for all interested parties to submit written comments on proposed rules. We will update you again when the rule making process moves forward.