Since November of 2014, we have written about predispute arbitration of consumer transaction disputes on nine separate occasions. This is emblematic of just how important arbitration is to the consumer finance industry. The CFPB has been leading the charge to end mandatory arbitration in consumer transactions, proposing a regulation to do just that. See our last blog on this subject at: https://www.sirote.com/blog/consumer-finance/arbitrationthe-cfpb-drops-the-other-shoe. However, elections have consequences, and one of the consequences of the Trump election, is that the CFPB's proposed Regulation on Arbitration may never see the light of day.
A history lesson is in order for some readers.
In the 1990's, consumer financial services companies were suffering multi-million dollar judgments for errors in disclosing terms and conditions in consumer finance contracts; or for not disclosing information retroactively deemed “material.” The consumer plaintiff's bar had successfully created a cottage industry by attacking credit sellers and traditional installment lenders arguing to sympathetic juries that credit transactions could be fraudulent based upon “deception.” It was not good enough for creditors to make all contract disclosures required by federal and state law. Debtors could still be “deceived” if the least sophisticated did not understand all of the terms and conditions of a credit transaction.
Deception, a form of fraud, can lead to punitive damages. Juries throughout the South (particularly in Texas, Louisiana, Tennessee and Alabama) were willing to award huge punitive damages on top of compensatory damages and attorney's fees available under federal law, for infractions that caused little actual harm to consumers.
After suffering too many absurd verdicts, financial institutions and their lawyers invoked by contract mandatory predispute arbitration pursuant to the Federal Arbitration Act to counter-balance the successes of the plaintiff's bar. And, the result over the last 20 years has been that arbitration leveled the field. Consumers are still receiving compensation, but only when justified by harm caused by unscrupulous lenders and sellers. The days of huge damages verdicts for incidental harm largely ended when mandatory consumer arbitration became a standard provision in most consumer contracts.
However, just as failure is not necessarily fatal, neither is success necessarily final. Financial services companies have become very concerned that the CFPB's regulating in this field will again open the litigation flood gates. They have complained loudly to both the CFPB and Members of Congress, imploring both to halt regulations that would change the status quo. The CFPB largely ignored such complaints. Congress was powerless to reign in the Bureau without controlling both Houses of Congress and the White House.
But, now the political landscape has changed.
As a result of the 2016 elections, it is likely that the regulation proposed by the CFPB in May of 2016—which would have virtually ended mandatory arbitration of a consumer contract dispute—is headed for the scrapheap. Those who have been around the consumer finance industry for a longer time understand the significance of this matter—and they are tuning up to say “good riddance” to the CFPB's proposal.