Updated: July 11, 2017
4:58 pm EDT
Roughly 240 days from now, banks and other financial companies will no longer be allowed to prohibit customers from banding together in class-action lawsuits through the use of binding arbitration clauses, as the Consumer Financial Protection Bureau today released a long-awaited finalized rule on arbitration.
The 775-page rule [PDF] doesn’t ban the use of forced arbitration clauses outright, but it dictates when financial institutions, lenders, and others can use the provisions and creates specific language to be included in consumer contracts.
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What’s Forced Arbitration?
Arbitration clauses allow companies to force customers with legal disputes out of the courtroom and into the process of private, often confidential, binding arbitration.
In a March 2015 report, the CFPB found that even though virtually all Americans are directly affected by at least one forced arbitration clause, a stunning 75% of consumers don’t know whether or not they have the right to sue their banks or credit card companies, and that fewer than 7% of those with arbitration clauses could even understand the clauses that they had unwittingly agreed to.
The most troubling aspect of arbitration clauses is the fact they almost universally contain bans on class actions. This means that if several customers are all wronged by a bank in the same way, they must each go through the arbitration process individually.
To make matters worse, arbitration rulings are final, even when the arbitrator made an error that would have changed the outcome. In some instances, the arbitrator doesn’t even give a reason for their decision — just a simple ruling in favor of one party.
The CFPB’s finalized rule — which was first proposed in May 2015 — is not an outright ban on the use of arbitration agreements.
So, What Does The Rule Mean?
Instead, affected companies can still use arbitration rules in their contracts with individual customers, but they can not use these clauses to stop consumers from being part of a group action.
The rule includes specific language that companies must use if they include an arbitration clause in a new contract.
The rule, which will take effect 60 days after it is published in the Federal Register and become enforceable after 241 days, does not apply to all consumer contracts. For instance, the CFPB notes that existing accounts are not subject to the arbitration ban.
However, a customer could pay off their bill, close an account, or take other action, then open a new account after the compliance deadline, which would be subject to the arbitration rules.
In addition to prohibiting certain uses of forced arbitration, the CFPB’s rule aims to make the arbitration process more transparent.
Because companies claim that arbitration actually benefits consumers, these businesses will be required to provide information to the CFPB regarding the number of arbitration claims that are filed against it and details on the awards provided to consumers who arbitrate.
The information such as initial claims, counterclaims, answers to claims, and awards issued in arbitration must be submitted to the CFPB with customer information redacted. The Bureau intends to publish these redacted materials on its website beginning in July 2019.
By gathering this data the CFPB says it will be enabled to better understand and monitor arbitration, including whether the process itself is fair.
The new rule applies to the hundreds of millions of contracts related financial products and services that are overseen by the CFPB. This means that companies providing credit card, auto loan, student loan, payday loan, and other financial contracts are covered by the new rule.
The rule addresses a number of the financial companies the CFPB evaluated in a March 2015 report that found forced arbitration clauses are prevalent in credit card, checking account, student loan, and wireless phone contracts.
The report included findings that a majority (53%) of credit cards currently have arbitration clauses, 92% of prepaid cards are subject to arbitration, and that while only 8% of banks and credit unions use the clauses, those few institutions are so large they represent 44% of all insured deposits.
“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” CFPB Director Richard Cordray said Monday. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”
Will It Stand?
The CFPB’s journey toward crafting an arbitration rule began in Oct. 2015, publishing an outline of the proposals under consideration and convened a Small Business Review Panel to gather feedback.
However, all of that work — including the finalized rule — could quickly be undone.
Officials with the CFPB noted today that the agency is aware that some groups and legislators will seek to have Congress to nullify the rule.
This could be done through the Congressional Review Act (CRA), a previously seldom used law that allows lawmakers to undo recently finalized regulations within a limited window of time.
While the Bureau notes that it believes the rules is in the “best interest” of consumers, it isn’t unprepared for a fight.
In fact, the CFPB has endured several attempts from the banking industry to scuttle arbitration rules.
The Womack-Graves Amendment — named for Reps. Steve Womack (AR) and Tom Graves (GA) — to the Financial Services and General Government Appropriations Act sought to compel the CFPB to effectively redo its entire three-year arbitration study before moving forward with any regulations. That rider ultimately got the axe, but its supporters have vowed to continue fighting against restrictions on the practice.
In April 2015, Rep. Sean Duffy of Wisconsin — whose campaign has received more than $300,000 from the financial, credit, banking, and investment industries thus far in the 2016 election cycle and who received more than $350,000 from these same industries only two years ago — wrote a letter to CFPB Director Cordray, informing him of a pending investigation into the arbitration rule by the House Financial Services Committee, and demanding that the Bureau produce information regarding any communication between CFPB officials, consumer advocacy groups, and organizations representing trial attorneys.
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A Welcome Rule
Despite the banking industry’s likely protest of the rules, several consumer groups were quick to applaud the CFPB’s arbitration rule.
George Slover, senior police counsel for our colleagues at Consumers Union called the CFPB’s rule a “measured approach,” using thorough review and consideration.
“This rule targets one of the worst problems with arbitration, when it shields financial companies from accountability for widespread wrongdoing,” Slover said. “This rule takes an important step to restore some basic rights that consumers need and deserve, and to restore some accountability for financial companies.”
Lauren Saunders, associate director of the National Consumer Law Center, notes that the rule will help in ensuring that financial institutions are held accountable when they break the law.
For example, U.S. PIRG consumer protection director Ed Mierzwinski noted that the rule will prevent Wells Fargo and other wrongdoers from blocking groups of consumers from taking them to court, and “force better behavior in the financial marketplace.”
In light of Wells Fargo’s fake account fiasco, the company argued that mandatory arbitration clauses on its actual accounts prevented customers from bringing class actions against its millions of fake accounts.
Rohit Chopra, Senior Fellow at the Consumer Federation of America, echoed those sentiments, noting that the rule will help to combat “the culture culture of companies profiting from charging illegal fees and committing other crimes against their customers.”
Advocates add that by banning financial companies from using forced arbitration clauses to prohibit class-action lawsuits, the CFPB is giving consumers an avenue to take on a big corporation when they wouldn’t have been able to afford to do so in the past.
“If consumers can’t join together to hold banks accountable through class-action lawsuits, then the banks’ appetite for swindling will know no bounds, as we have seen repeatedly,” Robert Weissman, president of Public Citizen, said in a statement, calling the rule of “paramount importance.”
On the other side of the argument, the American Bankers Association noted that it was disappointed in the CFPB’s rule.
The group claims that the CFPB is putting class action lawyer before consumers and that, under the final rule, consumers stand to lose as they would will receive “virtually nothing” in class-action cases.