The Consumer Financial Protection Bureau has issued a rule that would ban class-action waivers in arbitration agreements for individuals using consumer finance products and services. A copy of the rule is available here.
The rule would prevent financial institutions from requiring individuals to submit to binding arbitration in instances of wrongdoing, instead of joining with other individuals to file class-action lawsuits.
There are rumors that Congress will seek to overturn the rule using a little-known law called the Congressional Review Act, and CFPB Director Richard Cordray acknowledged that possibility in prepared remarks announcing the rule.
“I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule,” Cordray said. “That is a process that I expect will be considered and determined on the merits. My obligation as the Director of the Consumer Bureau is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done.”
By preventing individuals from filing class-action lawsuits, financial services organizations are, according to the CFPB:
- Denying consumers their day in court
- Avoiding paying out big refunds
- Continuing harmful practices
In discussing the announcement of the rule, which will go into effect 60 days after it is published in the Federal Register, ACA International expressed its disappointment by reminding the industry that it filed a comment letter “strongly opposing” the proposed rule.
“Despite the CFPB’s mischaracterization of arbitration as harmful to consumers, arbitration actually benefits consumers by reducing the time to achieve a resolution of claims brought by or against consumers, decreasing the expenses of all parties to the arbitral proceeding as compared to litigation, and limiting the legal and administrative fees of formal litigation,” ACA wrote. “In addition, as ACA has also pointed out to the CFPB, Fair Debt Collection Practices Act cases are uniquely suited to streamlined, effective adjudication through arbitration.”
The rule prohibits financial services providers from using a pre-dispute arbitration agreement to block class-actions and requires those providers to insure language in their arbitration agreements that reflects this new change. The CFPB said this component of the rule is based on a study it conducted the revealed that individuals “rarely” file individual lawsuits or arbitration cases to seek relied.
As well, the rule requires financial services providers that use pre-dispute arbitration agreements to submit data related to arbitration and court proceedings to the CFPB.
For the ARM industry, a ban on class-action waivers may open companies up to more lawsuits, especially those from attorneys and individuals who make habits of filing suits against companies.
