CFPB Proposes Rule Banning Mandatory Arbitration Clauses

The Consumer Financial Protection Bureau (CFPB) is proposing a rule that would prohibit the use of mandatory arbitration clauses in the contracts for certain financial products. The bureau first introduced the proposal last year.

Such arbitration clauses have the effect of blocking consumers from bringing class action lawsuits, the CFPB says. This, in turn, forces consumers to pursue claims individually. However, they seldom do, mainly because of the legal costs involved, research conducted by the bureau last year shows.

The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the CFPB to study the use of arbitration clauses and to issue regulations that protect consumers, if they are needed.

The CFPB says that prohibiting these clauses will allow consumers to have their “day in court,” which, in turn, will deter financial services companies from violating the law.

“Our study on arbitration released in 2015 showed that very few consumers ever bring – or think about bringing – individual actions against their financial service providers either in court or in arbitration,” the bureau says in a release. “The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies.”

The bureau is now accepting comments on the proposal.

The rule, if approved, would have little to no impact on the residential mortgage market, as mortgage lenders are already prohibited from using arbitration agreements under a rule that took effect in 2013.

The Truth in Lending Act ban on mandatory arbitration provisions in certain mortgage loans was one of the amendments to Regulation Z made by the CFPB as part of its final rule on loan originator compensation.

Still, mortgage lenders may want to keep an eye on this development in case there are any legal challenges to the bureau’s rulemaking.

In a statement, Rob Nichols, president and CEO of the American Bankers Association, warns that, “Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted.”

“Banks resolve the overwhelming majority of disputes quickly and amicably,” Nichols says. “When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time – and at a fraction of the cost – of expensive litigation. This helps keep costs down for all consumers.

“Despite acknowledging these clear benefits in its 2015 study, the CFPB has chosen to put the future of arbitration at risk by requiring companies to face a flood of attorney-driven class action suits from which consumers receive virtually nothing,” Nichols adds. “We hope the CFPB will use the public comment period to rethink its approach to regulating arbitration in a way that puts consumers – not class action lawyers – first.”


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