The Consumer Financial Protection Bureau (CFPB) announced Oct. 7th that it is going forward with a proposal to bar companies from enforcing mandatory consumer arbitration class-action waivers until after class-action certification is denied or the litigation is dismissed. This approach of favoring litigation over arbitration follows the CFPB’s 700-page study and report to Congress released last March, which was required by Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Section 1028(b) of the Act authorized the CFPB to promulgate regulations “prohibiting or limiting” the use of pre-dispute arbitration clauses to the extent consistent with the CFPB’s research, findings, the public interest, and the interests of consumers. The study found, among other things, that consumers benefit more from class-action settlements rather than arbitration (See GT AlertCFPB Releases its Consumer Arbitration Study, April 7, 2015). The study has been roundly criticized by industry experts and legal professionals as relying on incomplete and skewed data in favor of consumers.

Instead of an outright ban on arbitration class-action waivers as pushed by consumer advocacy groups, however, the CFPB’s recent announcement is modeled on the way broker-dealer disputes are handled by FINRA, which has been blessed by the U.S. Securities and Exchange Commission.

The CFPB’s Director, Richard Cordray, in prepared remarks at a Denver field hearing, stated that elimination of mandatory arbitration of consumer disputes and the accompanying waiver of class and collective actions would end the “free pass” enjoyed by companies not  “being held accountable to their customers” through court proceedings. The CFPB hopes to curb an established and well developed industry practice for the resolution of consumer disputes where arbitration is mandatory in agreements for credit cards, bank accounts, payday loans, certain auto loans, and private student loans. The U.S. Supreme Court, most recently in AT&T Mobility v. Concepcion, 563 U.S. 321 (2011), and its progeny, has consistently supported arbitration as the favored remedy for the resolution of consumer disputes as more cost-effective, efficient, and consumer friendly, when compared to litigation.

The pretense that the CFPB is not proposing a complete ban on mandatory arbitration and class-action waivers is evident in Director Cordray’s remarks. As he stated, litigation would proceed as the first and primary remedy, with companies needing to disclose to consumers in their agreements that arbitration “does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court.”

With the March study – self-described as “landmark” – serving as its foundation, the CFPB is presenting an outline of proposals in preparation for a Small Business Regulatory Enforcement Fairness Act Panel (SBREFA), created by the Small Business Regulatory Enforcement Fairness Act of 1996. Through the panel, the CFPB hopes to obtain input from small businesses likely to be affected by proposed rulemaking on arbitration agreements. Some of the discussion topics being considered – and for which information is being gathered in the form of 28 questions in anticipation of the SBRP meeting – include the following: the initial reasons for including arbitration agreements for resolving consumer financial disputes and whether those reasons still apply; whether barring class action waivers would influence a business’s decision to continue to use arbitration agreements for dispute resolution; prior experience as a defendant in class action litigation; and, whether arbitration clauses limit or prevent being faced with class action litigation, among other issues intended to spark further discussion.

The SBREFA meeting will be held Oct. 28, with panelists including the CFPB, the Chief Counsel for Advocacy of the Small Business Administration, and the Office of Management and Budget’s Office of Information and Regulatory Affairs. The CFPB’s Consumer Advisory Board’s Oct. 22 agenda also included a discussion on arbitration, which may provide an update for the SBRP meeting.