CFPB Releases Arbitration Proposal

On May 5, the Consumer Financial Protection Bureau (the “CFPB”) released much-anticipated proposed rules for mandatory arbitration clauses, which the CFPB colloquially refers to as “contract gotchas.” The proposed rules follow on the heels of the CFPB’s March 2015 Arbitration Report, from which the CFPB concluded that mandatory arbitration clauses are detrimental to consumers and that class actions provide a more effective means for consumers to challenge problematic practices by financial services providers. As expected, the proposed rules would significantly restrict mandatory arbitration clauses.

Overall, the proposed rules impose two key requirements regarding mandatory arbitration clauses. First, the proposed rules would require that covered providers that include arbitration clauses in agreements also include a notice specified by the rules that informs consumers that an arbitration clause will not prevent the consumers from being part of a class action. Second, the proposed rules would require that covered providers that participate in arbitration pursuant to a pre-dispute arbitration agreement submit records to the CFPB, including claims filed and awards issued in the proceedings.

According to the CFPB, the proposed rules provide the following benefits:

• A day in court for consumers. The CFPB explained that class actions are more beneficial to consumers because the damages involved are often too small to make it practical for a single consumer to pursue an individual lawsuit. Therefore, the CFPB believes that opening the door for class actions will enable consumers to obtain relief they would otherwise not receive.
• Deterrent effect. The CFPB posited that arbitration clauses allow covered providers to “avoid being held accountable for their conduct.” Thus, under that logic, class actions will “incentivize companies to comply with the law to avoid group lawsuits.”
• Increased transparency. The CFPB opined that the proposed rules will “enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.”

The proposed rules conflict with a number of pointed comments from industry groups, which stressed, among other things, that the data cited in the CFPB’s March 2015 Arbitration Report confirmed that arbitration was more beneficial to consumers because (1) consumers were less likely to receive a day in court in class actions—as an example, out of all of the class actions cited in that Report, none proceeded to trial; (2) arbitration is faster, less expensive, and more effective than litigation; and (3) consumers that proceed in arbitration receive 166 times more in settlement than those in class actions. Instead, CFPB Director Richard Cordray stated in his May 5, 2016, prepared comments that “[i]f arbitration truly offers the benefits that its proponents claim,… then it stands to reason that companies will continue to make it available.”

Comments on the proposed rules are due 90 days after the Federal Register publishes the CFPB’s Notice of Proposed Rulemaking.

The proposed rules are available on the CFPB’s website.

If you have any questions about the proposed rules please contact Elizabeth Khalil (312-627-2138 or ekhalil@dykema.com), Dawn Williams (616-776-7518 or dwilliams@dykema.com), or your Dykema relationship attorney.